USD/INR sees more downside as lower Oil prices strengthen Indian Rupee
- The Indian Rupee holds onto gains around 85.95 at open against the US Dollar amid a positive market mood.
- Oil prices are likely to fall further if Israel and Iran keep to the truce.
- Fed’s Powell reiterates that the central bank needs more clarity on tariffs before reducing interest rates.
The Indian Rupee (INR) opens firmly near the weekly high around 85.95 against the US Dollar (USD) on Wednesday. The USD/INR pair struggles to gain ground as the Indian currency strengthens on expectations that the Oil price could decline further, following confidence that both Israel and Iran will not violate the ceasefire agreement.
During the Asian trading session, the West Texas Intermediate (WTI) Oil price seems fragile near an almost two-week low around $64.00.
Lower Oil price bodes well for currencies from nations that rely heavily on Oil imports to fulfil their energy needs, such as the Indian Rupee.
On Tuesday, United States (US) President Donald Trump stated in a post on Truth.Social that a truce between Israel and Iran has become effective and urged them not to violate. “The ceasefire is now in effect. Please do not violate it!" Trump wrote.
Meanwhile, the Indian equity market has extended their gains on lower Oil prices and improving investors’ risk appetite amid easing geopolitical tensions in the Middle East. Nifty50 opens almost 100 points higher around 25,150, and Sensex30 jumps 0.83% above 82,400. On Tuesday, Foreign Institutional Investors (FIIs) sold equity worth Rs. 5,266.01 crores.
Daily digest market movers: USD/INR weakens as US Dollar underperforms
- The downside bias towards the USD/INR pair is also driven by weakness in the US Dollar as easing geopolitical tensions have forced traders to pare bets in safe-haven assets. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, appears fragile near the weekly low around 98.00.
- The US currency struggles to gain ground even though Federal Reserve (Fed) Chair Jerome Powell has signaled in the semi-annual testimony before the US House Financial Services Committee on Tuesday that he will not endorse interest rate cuts in the July policy meeting.
- Powell stated the central bank needs more time to “assess the impact of still-unresolved tariff rates on inflation and growth”. He guided that the “impact of the new trade policy will be reflected in the June and July data”.
- Jerome Powell didn’t rule out the scenario that the impact of new international policies could be “one-time” on inflation. He stated that the central bank will “bring interest rates down sooner if officials find price pressures well contained”.
- Contrary to Jerome Powell’s ‘wait-and-see’ approach, Fed officials: Vice Chair Michelle Bowman, Governor Christopher Waller, and Chicago Fed President Austan Goolsbee have expressed confidence that the impact of tariffs on inflation will be limited and have warned of growing downside risks to the labor market. Fed officials Waller and Bowman also expressed the need to reduce interest rates as soon as July to avoid further cracks in the job market.
- Going forward, investors will focus on New Home Sales data for May, which will be published at 14:00 GMT. Economists expect households to have bought 0.7 million homes, slightly lower than 0.743 million in April. Investors will closely monitor the housing data as the latest studies showed that households postponed new home demand due to higher mortgage rates and uncertainty over Trump’s tariff policy.
Technical Analysis: USD/INR seems vulnerable around 20-day EMA
The USD/INR pair struggles to hold the 20-day Exponential Moving Average (EMA) around 86.00, suggesting that the near-term trend has become uncertain.
The 14-day Relative Strength Index (RSI) slides vertically below 50.00 after remaining above 60.00 in past few trading days, indicating a strong bearish reversal.
Looking down, the June 12 high at 85.70 will act as key support for the major. On the upside, the June 24 high of 86.60 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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