USD/INR extends losing streak ahead of flash India-US PMI data for August
- The Indian Rupee rises to near 87.10 against the US Dollar at open ahead of preliminary India-US PMI data for August.
- The key trigger for the USD/INR pair will be the Jackson Hole Symposium.
- FIIs continue to pare stakes from Indian stock markets.
The Indian Rupee (INR) extends its winning streak against the US Dollar (USD) for the fourth trading day on Thursday. The USD/INR pair slides to near 87.10 as the announcement of Goods and Services Tax (GST) reforms by Indian Prime Minister Narendra Modi on the Independence Day has increased investors’ confidence that the Reserve Bank of India (RBI) will be reluctant to adopt an aggressive monetary easing approach.
On August 15, India’s PM Modi announced that the government will unfold GST 2.O in which taxes on goods will be reduced to boost consumption. The impact is clearly visible on Indian stock markets, which have risen significantly since the announcement. Nifty 50 is up almost 1.5% to near 25,070. The 50-stock basket hit a fresh four-week high around 25,150.
Contrary to Nifty50’s outperformance, overseas investors have been paring stakes from Indian equity markets consistently. So far in August, Foreign Institutional Investors (FIIs) have sold Indian equities worth Rs. 25,375.01 crores. On Wednesday, the selling figure by FIIs came in at Rs. 1,100.09 crores.
Meanwhile, investors await flash private sector Purchasing Managers’ Index (PMI) data for August from both India and the United States (US), which will be published during the day.
Investors will closely monitor India’s PMI data to gauge the impact of the US-imposed tariffs on the sentiment of business owners and the export order book.
The US S&P Global PMI report is expected to show that the overall business activity grew at a modest pace. The Manufacturing PMI is expected to come in at 49.5, down from 49.8 in July, suggesting that the activity contracted at a faster pace. The Service PMI is also seen lower at 54.2 from the prior release of 55.7.
Daily digest market movers: Indian Rupee gains against US Dollar
- Investors brace for a broader sideways trend in the USD/INR pair as they await Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium on Friday.
- During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades in a tight range around 98.25.
- Investors will closely monitor Fed Powell’s speech to get cues about whether the United States (US) central bank will cut interest rates in the September meeting.
- According to the CME FedWatch tool, there is an almost 85% chance that the Fed will cut interest rates by 25 basis points (bps) to 4.00%-4.25% in the September meeting.
- The Federal Open Market Committee (FOMC) minutes of the July monetary policy meeting, released on Wednesday, showed that a majority of officials, including Chair Jerome Powell, argued against the need for any monetary policy adjustment until they get clarity on the magnitude and persistence of higher tariffs’ effects on inflation," Reuters reported.
- According to FOMC minutes, two members who supported the need to unwind monetary policy restrictiveness were Fed Governor Michelle Bowman and Christopher Waller. They prioritized cooling labor conditions over risks of de-anchoring consumer inflation expectations.
- Meanwhile, US President Donald Trump has attacked the Fed’s independence again as he has called Fed Governor Lisa Cook to resign after his political allies accused her of holding mortgages in Michigan and Georgia. In response, Cook has stated that she had "no intention of being bullied to step down" from her position at the central bank, Wall Street Journal (WSJ) reported.
Technical Analysis: USD/INR slides below 20-day EMA
USD/INR declines for the fourth straight trading day. The near-term trend of the pair has turned bearish as it trades below the 20-day Exponential Moving Average (EMA), which trades around 87.28.
The 14-day Relative Strength Index (RSI) slides towards 40.00. A fresh bearish momentum would emerge if the RSI falls below that level.
Looking down, the July 28 low around 86.55 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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