USD/INR gains ground on Middle East jitters
- The Indian Rupee weakens in Wednesday’s Asian session.
- Risk-off sentiment from escalating Israel-Iran tensions weighed on the INR.
- The Fed interest rate decision will take center stage later on Wednesday.
The Indian Rupee (INR) edges lower to near the weakest level in more than two months on Wednesday. The Indian currency remains under selling pressure, falling alongside most Asian peers as crude oil prices surged on rising geopolitical tensions in the Middle East. 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.
The US Federal Reserve (Fed) interest rate decision will be the highlight later on Wednesday. The Fed is widely expected to keep policy rates unchanged in the range of 4.25%-4.50% at its June meeting. Investors will closely monitor its projections for policy rates and commentary from Chair Jerome Powell. Any dovish remarks from the Fed officials could drag the US Dollar (USD) lower and help limit the local currency’s losses.
Indian Rupee remains weak amid rising geopolitical tensions
- "Geopolitical uncertainties and foreign investors selling Indian stocks and bonds have added pressure on the rupee. We won't see any appreciation until the oil prices cool," said Anindya Banerjee, head of research, FX and interest rates, Kotak Securities.
- According to a report from JM Financial, four companies, including food delivery giant Swiggy and solar module producer Waaree Energies, might be included in MSCI Indexes in the next August review. The potential inclusions might trigger inflows of about $850 million from passive funds that monitor MSCI gauges, said JM Financial.
- US President Donald Trump said that he wants a permanent end to Iran's route to nuclear weapons. Additionally, Trump posted on his social media platform late Tuesday, calling for Iran’s “unconditional surrender.”
- Israel is set to intensify its attacks on Tehran, while the United States (US) is considering expanding its role amid rising tensions between Israel and Iran.
- US Retail Sales declined by 0.9% in May, compared to the 0.1% decrease (revised from +0.1%) recorded in April, the US Census Bureau reported on Tuesday. This reading came in below the market consensus of -0.7%.
- The Fed is anticipated to leave the interest rate unchanged at the June meeting. Traders now see a nearly 80% possibility of a Fed rate cut in September, followed by another one in October, according to Reuters.
USD/INR retains bullish tone in the longer term
The Indian Rupee trades stronger on the day. The USD/INR pair maintains a constructive outlook, with the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Additionally, the 14-day Relative Strength Index (RSI) stands above the midline near 61.70, suggesting bullish vibes stay in play in the near term.
The first upside barrier for USD/INR emerges at 86.71, the high of April 9. Sustained trading above this level could pave the way to 87.38, the high of March 11. Further north, the next hurdle to watch is 87.53, the high of February 28.
In the bearish event, the first support level is located at 85.60, the 100-day EMA. A break below the mentioned level could allow the downtrend to resume to 85.30, the low of June 2. The additional downside filter to watch is 85.04, the low of May 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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