Ind, US inflation data hint downward bias on dollar-rupee forward premiums

Cooling inflation in India and tariff-induced price pressures in the US are cementing a downward bias on dollar-rupee forward premiums, according to analysts.

India's retail inflation hit a six-year low in June, while US consumer prices rose at their fastest pace since February, with higher goods costs hinting at tariff effects.

This divergence is likely to persist. Economists project India's consumer price index inflation to touch a record low in July, while the tariff impact is seen becoming more pronounced in the US inflation prints for July and August.

Cooling domestic inflation is prompting calls for at least one more interest rate cut by the Reserve Bank of India, while analysts believe the rising US price pressures due to tariffs may keep the Federal Reserve from cutting rates.

BofA Global Research sees no Fed rate cuts in 2025 and urges investors to "fade" the 2025 easing priced in. Markets currently expect just under two cuts this year.

Diverging rate outlooks for the two central banks, shaped largely by the contrasting inflation trajectories, would put the squeeze on dollar-rupee forward premiums, which reflect the US-India interest rate differential.

"The odds of another rate cut have increased in India and inflation will likely fall below 2 per cent in July, so these bets will rise going into the August meeting. This could keep USD/INR forward premia under stress," ANZ forex and rate strategist Dhiraj Nim said.

On Wednesday, dollar-rupee forward premiums were a tad lower, with the one-year implied yield down 2 basis points at 1.96 per cent.

The odds of US rate cuts are "going lower, while India's rate cut chances are rising. This builds the case for 1-year to be squeezed lower to 1.90 per cent," a swap trader at a mid-sized private bank said.

The rupee, meanwhile, was modestly higher at 85.78 per dollar, comforted by broad-based interbank dollar sales.