USD/INR edges higher ahead of India GST council meeting
- The Indian Rupee ticks down against the US Dollar at open ahead of a two-day GST council meeting.
- Indian Commerce Minister Goyal confirmed that New Delhi is in talks with Washington on a trade deal.
- A sharp increase in long-term bond yields across the globe improves safe-haven demand.
The Indian Rupee (INR) opens slightly lower against the US Dollar (USD) on Wednesday. The USD/INR pair ticks up to near 88.23 ahead of the two-day Goods and Services Tax (GST) council meeting on Wednesday, aiming to revise tax slabs from four to two.
On the eve of independence on August 15, Indian Prime Minister Narendra Modi announced that the government will reveal new GST slabs to boost consumption around Deepawali, which will be celebrated on October 21.
According to a report from The Indian Express, the centre will abolish 12% and 28% slabs, and will shift these items into the remaining 5% and 18% tax brackets. Such a scenario will be inflationary for the Indian economy and may restrict the Reserve Bank of India (RBI) from reducing interest rates in the near term.
Meanwhile, India’s Trade Minister Piyush Goyal has expressed confidence, in his speech at an industry chamber event on Tuesday, that New Delhi will close a tariff deal with the United States (US). “We are in dialogue with the US for a bilateral trade deal,” Goyal said, The Economic Times reported. Goyal added that India is getting new trading arrangements with countries such as the European Union (EU), Chile, Peru, New Zealand, Australia, Oman and has already concluded deals with the EFTA bloc, UK, and UAE.
A slightly positive commentary from Indian Commerce Minister Goyal on trade deal with the US has come at a time when President Donald Trump has been criticizing New Delhi for doing “one-sided business” with Washington for a long time.
On Tuesday, US President Trump criticized India again while addressing reporters at the Oval Office. "We get along with India very well, but for many years, it was a one-sided relationship. India was charging us tremendous tariffs, the highest in the world,” Trump said, Hindustan Times reported.
Daily digest market movers: US Dollar trades firmly ahead of US JOLTS Job Openings data
- A slight upside move in the USD/INR pair is also driven by strength in the US Dollar. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rose to near 98.50.
- The US Dollar trades firmly as its safe-haven demand has increased, following risk-off market sentiment due to soaring long-term bond yields worldwide.
- A significant increase in long-term bond yields signifies mounting investors’ concerns over government debt. Rising government borrowing costs often lead to a decline in welfare spending, henceforth increasing the appeal of safe-haven bets.
- Domestically, the verdict from the US appeals court against President Donald Trump’s tariffs, citing many of them as “illegal”, has led to a sharp decline in indices on Wall Street. US tech stocks tumbled after an extended weekend on Tuesday after the court ruled against Trump’s tariffs, stating that Trump wrongfully invoked emergency law.
- Meanwhile, US President Trump has announced that he will push the case to the Supreme Court for an expedited ruling on tariffs.
- On the economic front, investors await the Nonfarm Payrolls (NFP) data for August, which will be released on Friday. Investors will pay close attention to the NFP data as the July report intensified market expectations in favor of interest rate cuts by the Federal Reserve (Fed) for the September meeting.
- According to the CME FedWatch tool, there is an almost 92% chance that the Fed will cut interest rates in the September policy meeting.
- In Wednesday’s session, investors will focus on JOLTS Job Openings data for July, which will be published at 14:00 GMT. The report is expected to show that US employers posted fresh 7.4 million jobs, almost in line with the prior reading of 7.44 million.
Technical Analysis: USD/INR consolidates above 88.00
The USD/INR pair broadly turns sideways after posting a fresh all-time high of around 88.50 on Monday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 87.69.
The 14-day Relative Strength Index (RSI) stabilizes above 60.00, suggesting that a fresh bullish momentum has come into effect.
Looking down, the 20-day will act as key support for the major. On the upside, the pair has entered uncharted territory. The round figure of 89.00 would be the key 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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