USD/INR gains even as Fed’s Powell delivers dovish monetary policy guidance
- The Indian Rupee weakens against the US Dollar as investors ignore dovish interest rate guidance from Fed Chair Powell.
- Fed’s Powell warns of downside labor market risks during the Jackson Hole Symposium.
- US-India trade tensions keep the Indian Rupee on its back foot.
The Indian Rupee declines against the US Dollar (USD) after a flat opening at the start of the week. The USD/INR pair rises to near 87.60, even as the US Dollar faces selling pressure, following comments from Federal Reserve (Fed) Chair Jerome Powell at the Jackson Hole (JH) Symposium signaling that economic conditions for monetary policy adjustments have become appropriate.
At the time of writing, the US Dollar Index (DXY), strives to gain ground near an almost four-week low near 97.70.
On Friday, Fed Chair Powell surprisingly delivered a dovish guidance on the interest rate outlook, citing growing labor market concerns. "Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance," Powell said. He added, “Downside risks to employment are rising, and if those risks materialize, they can do so quickly.
Before Powell’s speech at Jackson Hole Symposium, investors were anticipating that he would reiterate a “wait and see” approach on interest rates as price pressures are well-above the Fed’s target of 2%. Powell too acknowledged that risks to inflation remain tilted to the upside due to tariffs imposed by United States (US) President Donald Trump, however, he believes that its impact will be short-lived. "Possible that tariff-driven upward pressure on prices could spur lasting inflation dynamic, but unlikely, given downside risks to labor market," Powell said.
Daily digest market movers: Indian Rupee weakens against US Dollar
- The Indian Rupee fails to capitalize on the US Dollar’s weakness due to ongoing trade tensions between India and the US. Imports from India into the US are expected to face 50% tariffs from Wednesday, which are the highest among Washington’s trading partners.
- The imposition of higher additional duties on Indian goods by the US makes them less competitive in global markets, a scenario that could force producers to reduce their prices.
- Meanwhile, the Indian government has taken steps to offset the impact of global trade risks in the form of tax cuts, which aim to boost domestic consumption. On the eve of Independence Day, Indian Prime Minister Narendra Modi vowed to announce new Goods and Services Tax (GST) reforms around Diwali, which will be celebrated on October 21.
- Economists expect new GST reforms by the Indian government to boost consumer spending on discretionary goods. Recent comments from Finance Minister Nirmala Sitharaman have signaled that GST tax slabs will be revised to two from four.
- Additionally, the continuous outflow of foreign funds from the Indian stock market has also been a major drag on the Indian Rupee. Through August, Foreign Institutional Investors (FIIs) have pared stake worth Rs. 25,751.02 crores from Indian equity markets. On Monday, Indian markets opened on a positive note due to risk-on market sentiment driven by the Fed’s dovish stance on the interest rate outlook. However, Nifty50 has given up some gains and strives to hold the key support level of 24,900.
- This week, the major trigger for the Indian Rupee will be Q2 Gross Domestic Product (GDP) data, which will be published on Friday. In the first quarter of the year, the Indian economy expanded at an annual pace of 7.4%.
Technical Analysis: USD/INR stays above 20-day EMA
The USD/INR pair rises to near 87.60 in the opening session on Monday, but stays inside Friday’s trading range. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades 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 5 high around 88.25 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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