USD/INR opens higher amid caution ahead of Fed Chair Powell’s speech
- The Indian Rupee declines to near 87.55 against the US Dollar ahead of Fed Chair Powell’s speech at the Jackson Hole Symposium.
- Powell is expected to reiterate a “wait and see” approach on the interest rate outlook.
- The selling pressure by FIIs in Indian markets appears to have slowed.
The Indian Rupee (INR) opens lower against the US Dollar (USD) on Friday. The USD/INR pair rises to near 87.60 as the US Dollar demonstrates strength ahead of Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium at 14:00 GMT.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posts a fresh 10-day high around 98.70.
Market experts believe that Fed Chair Powell will reiterate a “wait and see” approach on the monetary policy outlook for the September policy meeting and the remainder of the year. “The most likely scenario is that Powell won’t provide any definitive clues on what the Fed will do next ahead of critical Nonfarm Payrolls (NFP) and Consumer Price Index (CPI) data,” analysts at Commonwealth Bank Australia said.
The Federal Open Market Committee (FOMC) minutes of the July policy meeting, released on Wednesday, also stated that members, including Jerome Powell, need time to gain absolute clarity on the “magnitude and persistence of higher tariffs’ effects on inflation”.
According to the CME FedWatch tool, there is an almost 75% chance that the Fed will cut interest rates by 25 basis points (bps) to 4.00%-4.25% in the September meeting. Traders have pared some Fed dovish bets this week, but ramped up significantly after the NFP report for July showed significant downward revisions in May and June data.
Daily digest market movers: Indian Rupee weakens against US Dollar
- Investors brace a cautious performance by the Indian Rupee ahead of scheduled Fed Powell’s speech at the Jackson Hole Symposium. On the domestic front, strong flash India’s HSCB Purchasing Managers’ Index (PMI) data for August has failed to support the Indian currency.
- The report showed on Thursday that the Composite PMI expanded to 65.2 from 61.1 in July due to strong business activity in both services and the manufacturing sector. The Services flash PMI touched an all-time high of 65.6, led by a sharp pickup in new business orders, both export and domestic.
- The PMI report also showed that expectations of business owners have improved strongly on the month and were most optimistic since March. Financial market participants are of the view that business sentiment would improve further as Indian Prime Minister Narendra Modi has promised to announce Goods and Services Tax (GST) reforms near Diwali in late October to boost domestic consumption.
- On Wednesday, a report from NDTV showed that India’s Finance Minister Nirmala Sitharaman also addressed the three Groups of Ministers set up by the GST Council to emphasise the importance of the Centre’s proposed reforms to the GST system, including the rate rationalisation efforts.
- Economists expect GST reforms to be inflationary for the economy and will restrict the Reserve Bank of India (RBI) from reducing interest rates aggressively. This year, the RBI has already reduced its Repo Rate by 100 basis points (bps) to 5.5%.
- After the announcement of GST reforms, some improvement has been observed in the position of overseas investors in the Indian stock market. So far this week, Foreign Institutional Investors (FIIs) have emerged as net buyers in the Indian equity markets. FIIs have invested a nominal amount of Rs. 63.11 crores in the August 18-21 period after remaining net sellers for over six weeks. A slowdown in FIIs' selling suggests that the sentiment of overseas investors towards Indian equity markets is improving.
Technical Analysis: USD/INR returns above 20-day EMA
USD/INR bounces back strongly from the three-week low around 87.00 and returns above the 20-day Exponential Moving Average (EMA), which is near 87.35.
The 14-day Relative Strength Index (RSI) rebounds from 50.00. A fresh bullish momentum would emerge if the RSI breaks above the 60.00 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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