USD/INR posts modest gains amid rising geopolitical tensions
- The Indian Rupee edges lower in Tuesday’s early Asian session.
- Higher crude oil prices undermine the INR, but US Dollar sales from foreign banks might cap its downside.
- The Fed interest rate decision will take center stage on Wednesday.
The Indian Rupee (INR) softens on Tuesday. A rise in crude oil prices amid the escalating geopolitical tensions in the Middle East weighs on the local currency. It’s worth noting that India is the world's third-largest oil consumer and higher crude oil prices tend to have a negative impact on the INR value.
Nonetheless, the US Dollar (USD) sales from foreign banks and the concerns about slowing growth in the US economy from the US President Donald Trump administration's trade policies might help limit the INR’s losses. Additionally, the foreign exchange intervention from the Reserve Bank of India (RBI) could prevent the Indian Rupee from significant depreciation.
Markets widely expect the Federal Reserve (Fed) will stay on hold when it concludes its two-day meeting on Wednesday, leaving the benchmark interest rate unchanged in a range of 4.25% to 4.50%. The primary focus will be on the Fed's policy guidance. Economists anticipate policymakers’ updated projections to also show two quarter-percentage-point reductions this year.
Indian Rupee remains weaker ahead of Fed rate decision
- "Given the current sentiment, the USDINR pair is expected to trade within the 86.80–87.40 range in the near to medium term," Amit Pabari, managing director of CR Forex Advisors, said. "A breakout beyond this band could trigger an additional move of 30–50 paise in the same direction, keeping market participants on high alert for potential volatility.”
- India’s Wholesale Price Index (WPI) inflation rose to 2.38% in February from the previous reading of 2.31%, the Ministry of Commerce and Industry reported on Monday. This figure came in hotter than the expectation of 2.36%.
- Retail Sales in the United States rose 0.2% MoM in February, compared to a fall of 1.2% (revised from -0.9%) in January, according to the US Census Bureau on Monday. This figure came in weaker than the market expectation for an increase of 0.7%.
- Retail Sales climbed 3.1% YoY in February versus 3.9% (revised from 4.2%) prior.
- According to the CME FedWatch tool, the markets have priced in nearly 75% odds of a quarter-point reduction to the policy rate by June.
USD/INR’s uptrend remains intact in the longer term
The Indian Rupee trades on a weaker note on the day. The USD/INR pair has broken out of a symmetrical triangle on the daily chart. In the longer term, the uptrend of the pair remains in play, with the price being above the key 100-day Exponential Moving Average (EMA). However, in the near term, further downside looks favorable as the 14-day Relative Strength Index (RSI) stands below the midline near 43.65.
The first upside barrier for USD/INR emerges near the support-turned-resistance level at 86.90. Green candlesticks and consistent trading above the mentioned level could see a rally to 87.38, the high of March 11, en route to 87.53, the high of February 28.
On the downside, the initial support level is located at 86.48, the low of February 21. A drop below this level could open the door for a move toward 86.14, the low of January 27.
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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