USD/INR remains broadly firm amid US-India trade tensions
- The Indian Rupee flattens around 88.90 at the open against the US Dollar, outlook remains bearish.
- FIIs continue to pare investments in the Indian stock market amid US-India trade tensions.
- US President Trump wants Democrats to allow the government to reopen before negotiating on healthcare benefits.
The Indian Rupee (INR) trades flat at open around 88.90 against the US Dollar (USD) on Tuesday. The USD/INR pair extends its sideways trend for the 10th straight trading day near its all-time high of 89.10, with investors remaining cautious amid ongoing trade tensions between the United States (US) and India.
The US economy has been charging 50% tariffs on imports from India, close to the highest among its trading partners, as New Delhi continues to purchase Oil from Russia. Washington has criticized New Delhi for buying Russian Oil, citing that funds from India are ultimately supporting Moscow to continue the war with Ukraine.
US-India trade tensions have remained a major drag on the sentiment of foreign investors towards India as an investment avenue. In the July-September period, Foreign Institutional Investors (FIIs) have sold equity shares worth Rs. 1,29,870.96 crores in the Indian stock market. So far in October, FIIs have sold shares worth Rs. 3,502.34 crores.
Despite continuous selling by overseas investors, the Indian stock market has performed strongly from the last three trading days, with the Nifty50 gaining 2.45% to near 25,200.
Daily digest market movers: The Fed is expected to cut interest rates two more times this year
- A slight strength demonstrated by the US Dollar in the wake of weakness in the Euro (EUR) and the Japanese Yen (JPY) due to political crisis in France and the election of fiscal dove Sanae Takaichi as Prime Minister in Japan, respectively, is also keeping the USD/INR pair on the front foot.
- During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 98.20.
- On the domestic front, the ongoing US government shutdown and firm Federal Reserve (Fed) dovish bets are expected to keep a lid on the US Dollar’s upside. Monday’s session of the US Senate ended without the stopgap bill being passed, with Democrats remaining stuck to their view that they won’t support a spending bill until the White House rolls back cuts announced in the health benefits program earlier this year.
- In response, the White House refrains from negotiating on healthcare benefits with Democrats until they allow the government to reopen. “I am happy to work with the Democrats on their Failed Healthcare Policies, or anything else, but first they must allow our Government to re-open,” Trump wrote in a post on Truth.Social.
- On the monetary policy front, traders seem confident that the Fed will cut interest rates by 25 basis points (bps) in each of its remaining two policy meetings this year, according to the CME FedWatch tool. Fed dovish expectations have been promoted by deteriorating job market conditions.
- For more cues on the interest rate outlook, investors will focus on Fed Chair Jerome Powell’s speech, which is scheduled for Thursday.
Technical Analysis: USD/INR continues to trade sideways near 89.00
USD/INR wobbles near 89.00 for over a week. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 88.62.
The 14-day Relative Strength Index (RSI) stays above 60.00, suggesting a strong bullish momentum.
Looking down, the pair could slide to near the September 12 high of 88.57 and the 20-day EMA, if it breaks below the September 25 low of 88.76.
On the upside, the pair could extend its rally towards the round figure of 90.00 if it breaks above the current all-time high of 89.12.
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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