The present investigation has attemped to optimize hydrogen reduction process for the mass production of Fe-8wt%Ni nanoalloy powder from ball milled powder. In-situ hygrometry study was performed to monitor the reduction behavior in real time through measurement of water vapor outflowing rate. It was found that the reduction process can be optimized by taking into account the apparent influence of water vapor trap in the reactor on reduction kinetics which strongly depends on gas flow rate, reactor volume and reduction.