The USD/INR faces pressure due to a slowdown in India’s WPI inflation, which reduced to 2.05% year-on-year in March. Expectations for India’s March CPI indicate a potential cooling to 3.6%, the lowest rate in eight months.
The Indian Rupee strengthened against the US Dollar, with USD/INR dropping over 0.30% to about 85.80 during early European trading on Tuesday. A slower rise in food prices contributed to a four-month low in WPI inflation, from 2.38% in February, against a predicted 2.5% in a Reuters poll.
Wholesale Food Prices
Wholesale food prices rose by 4.66% in March compared to 5.94% previously. Traders anticipate India’s March CPI, with hopes of a reduced inflation rate, possibly leading to future rate cuts by the Reserve Bank of India amid a slowing GDP and global trade uncertainties.
Indian stock markets rose on Tuesday, influenced by gains from Wall Street after the U.S. announced tariff exemptions for some tech products. Additionally, the US Dollar Index edged higher after reaching its lowest since 2022, amid ongoing stagflation concerns.
Atlanta Fed President Raphael Bostic mentioned that the US Federal Reserve still has challenges in reducing inflation to the 2% target, challenging market expectations for further rate cuts.
With inflation indicators in India losing momentum, notably the wholesale price index softening more than anticipated, we’ve now seen the Rupee clawing back some ground against the Dollar. This drop in the USD/INR pair underscores how currency movements are aligning with macroeconomic data that continues to surprise on the downside. WPI inflation dipping to 2.05%—well beneath consensus—signals cooling demand pressures, especially in food and input costs, which typically influence broad pricing behaviours down the line.
US and Indian Monetary Policy
When wholesale food inflation decelerates as markedly as it has—from 5.94% to 4.66%—it highlights a moderation that often flows through to consumer prices, triggering expectations of looser policy down the road. The belief that headline CPI could slide to 3.6% now puts monetary easing back on the table, particularly when growth and trade metrics are not exactly firing on all cylinders. Any re-evaluation by the RBI, should CPI print lower than expected again, might prompt us to start modelling for a shallow rate cut cycle earlier than Q4.
This is where the differential in US and Indian monetary policy expectations becomes ever more relevant, particularly for short-dated INR swaps and futures positioning. With Bostic leaning against the tide of rate cut optimism in the US, futures that had priced in aggressive Fed easing may have to reverse course. Notably, the US Dollar Index recouped some losses, largely driven by these revised expectations and persistent worries on the US front around stagflation—a condition where inflation remains high even as growth slows.
Markets responded to the divergence in outlooks. Indian equities rallied partly in sympathy with US stock sentiment, buoyed by the White House’s easing of tariffs on certain tech imports. While a weaker Dollar is generally supportive for risk assets, renewed firmness in the greenback—particularly one tied tightly to less dovish Fed rhetoric—could reintroduce volatility around currency hedges.
From a derivatives perspective, we’re entering a period where short-term directional bets may yield more risk than reward unless strongly backed by fresh economic data. Short volatility strategies might offer a more appealing payoff profile, especially if CPI confirms current projections and central bank tone remains non-committal.
Options on USD/INR are likely to reflect this recalibrated equilibrium between disinflation in India and policy rigidity from Washington. Expect implied vols to compress slightly unless there’s a breakout in US macro metrics or more definitive cues from the RBI.
With the energy complex stable and geopolitical fears taking a backseat for now, rate differentials and inflation trajectories remain the primary inputs in assessing forward premiums on INR. In the weeks to come, keeping a close tab on any early signs of dissent within the FOMC and clarity from Patel’s camp on guidance will be key to managing position risk and entry timing.
