USD/INR bounces back as FIIs continue to pare stake in Indian stock market
- The Indian Rupee opens negatively against the US Dollar after a three-day winning streak.
- FIIs continue to sell in the Indian stock market despite Indian PM Modi announcing tax reforms.
- Investors await Jackson Hole Symposium, flash India-US PMI data.
The Indian Rupee (INR) opens lower against the US Dollar (USD) on Wednesday after a three-day winning streak. The USD/INR rebounds to near 87.30 as the consistent outflow of foreign funds from Indian stock markets, despite the announcement of Goods and Services Tax (GST) reforms by the government, has battered the domestic currency.
On Tuesday, Foreign Institutional Investors (FIIs) sold Rs. 634.26 crores worth of equities from the Indian stock market. So far in August, FIIs have pared stake worth Rs. 24,274.692 crores. There was a mild buying by overseas investors on Monday worth Rs. 550.85 crores after Indian Prime Minister Narendra Modi announced a tax bonanza to boost consumption, which will be unveiled near the Diwali festival in October.
A sluggish response by FIIs towards Indian stock markets, despite the government promising new tax reforms to uplift domestic demand, has failed to provide sustainable wings to Indian Rupee bulls.
Meanwhile, ongoing trade tensions between the United States (US) and India over the latter buying Oil from Russia have also contributed to halting the rally in the Indian Rupee. The US has increased tariffs on imports from New Delhi to 50% for buying Russian Oil, citing that Moscow is utilizing that money to fund its defense requirements for killing people in Ukraine.
Going forward, investors will focus on the preliminary India’s HSBC Purchasing Managers’ Index (PMI) data for August, which is scheduled to be released on Thursday.
Daily digest market movers: Upbeat US Dollar empowers USD/INR
- A decent recovery move in the USD/INR pair on Wednesday is also driven by strength in the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, refreshes a weekly high near 98.45. The Greenback strengthens as investors turn cautious ahead of the Jackson Hole (JH) Symposium, which is scheduled for August 21-23.
- Investors increase longs in the US Dollar on expectations that Federal Reserve (Fed) Chair Jerome Powell will maintain a hawkish guidance on the monetary policy outlook in his speech at the JH Symposium on Friday.
- "Given the relatively high bar for Powell to meet, there’s a bit of risk being baked into the markets that he leans to the hawkish side and the proverbial rug gets pulled from beneath investors," analysts at Capital.com said, Reuters reported.
- Jerome Powell has been arguing that the monetary policy needs to remain restrictive until the central bank gets clarity about how much US President Donald Trump’s tariffs will impact inflation and the economy.
- According to the CME FedWatch tool, the odds of the Fed cutting interest rates in the September meeting are almost 85%. Traders raised Fed dovish bets after the US Nonfarm Payrolls (NFP) report for July showed signs of weak labor demand, and the Consumer Price Index (CPI) report for the same month signaled limited impact of tariffs on inflation.
- This week, investors will also focus on the flash US S&P Global PMI data for August, which will be published on Thursday.
- On the global front, a report from Politico has signaled that the White House is considering Budapest as a potential location for a trilateral summit between US President Trump, Russian President Vladimir Putin, and Ukrainian President Volodymyr Zelenskiy for further discussions on ending the war in Ukraine.
Technical Analysis: USD/INR recovers to near 87.30
The USD/INR rebounds after a three-day losing streak to near 87.30 at open on Wednesday. The pair bounces back after attracting bids below the 20-day Exponential Moving Average (EMA) around 87.00.
The 14-day Relative Strength Index (RSI) finds cushion near 50.00. A bullish momentum would emerge if the RSI returns above 60.00.
Looking down, the July 25 high around 87.65 will act as key support for the major. On the upside, the August 11 high around 87.90 will be a critical hurdle for the pair.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
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