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INDIA RUPEE - India and US inflation reports reinforce the downward bias on dollar-rupee premiums

Analysts say that the easing of inflation in India, and the tariff-induced pressure on prices in the U.S. have a negative impact on dollar-rupee premiums.

India's retail price inflation reached a six-year-low in June. Meanwhile, U.S. consumer costs rose at the fastest rate since February. Higher goods prices hint at tariff effects.

This divergence will likely persist. Economists predict that India's consumer prices index will reach a new record low in July. Meanwhile, the impact of tariffs is expected to become more apparent in U.S. inflation figures for July and August.

The Reserve Bank of India is being urged to cut rates by at least one, but analysts are concerned that the Federal Reserve may not do so due to the increasing price pressures in the U.S. caused by tariffs.

BofA Global Research believes that the Fed will not cut rates in 2025. It urges investors to "fade in" 2025's easing. The markets currently expect just two rate cuts this year.

The divergent rate outlooks of the two central bank, primarily shaped by the different inflation trajectory, will put pressure on the dollar-rupee premiums that reflect the U.S. interest rate differential.

These bets are likely to increase going into the meeting in August. "The odds have increased that India will cut rates again and that inflation will fall below 2% by July. Dhiraj Nim, ANZ's forex and rate analyst, said that this could put pressure on the USD/INR future premia.

The implied yield for one year was down by 2 basis points to 1.96% on Wednesday.

India's chances of a rate cut are increasing, while the odds of a rate cut in the U.S. are decreasing. The case is made for the 1-year rate to be lowered to 1.90%, according to a swap dealer at a private mid-sized bank.

The rupee was slightly higher, at 85.78 dollars per rupee. This was due to a broad-based increase in interbank dollar sales.

(source: Reuters)