USD/INR corrects as Trump reiterates confidence in US-India trade deal
- The Indian Rupee opens higher against the US Dollar amid firm expectations that India and the US will reach a deal soon.
- Trump slams 14 countries with reciprocal tariffs on Monday.
- Investors await the FOMC minutes to be released on Wednesday.
The Indian Rupee (INR) opens higher against the US Dollar (USD) on Tuesday. The USD/INR pair corrects to near 85.88 from the weekly high of 86.15 posted on Monday. The pair falls back as United States (US) President Donald Trump has reiterated confidence that Washington will strike a trade agreement with India.
"We've made a deal with the United Kingdom, we've made a deal with China, we're close to making a deal with India,” Trump said to reporters at the White House on Monday.
The comments from US President Trump came after he announced tariff rates for 14 countries, including Japan and South Korea, were slapped with 25% tariffs, and threatened to raise them if they pursue retaliation.
Meanwhile, investors seek specifications of the likely trade deal as signs of an increase in exposure of Indian entities to competition from US companies would be unfavorable for the domestic currency.
According to a report from NDTV, Indian negotiators would aim to safeguard their agriculture anddairy sector, which are the backbone of the country in terms of job creation. New Delhi is also aiming for higher concessions on tariffs in labour-intensive exports like footwear, garments, and leather.
Another reason for a grim outlook of the Indian Rupee is Trump’s threat to impose a 10% tariff on countries aligning with BRICS’ anti-American policies. This comes at a time when the US and India are close to signing a trade agreement.
On the equity market front, Indian indices have opened on a cautious note as investors await the confirmation of the India-US trade pact. Nifty50 ticks down 0.13% to near 25,425 and Sensex30 edges lower slightly below 83,400. The next trigger for Indian markets is the earnings season of the first quarter of Financial Year (FY) 2025-2026, which will start with quarterly results of tech-giant Tata Consultancy Services (TCS) on July 9.
Daily digest market movers: Indian Rupee bounces back against US Dollar
- The Indian Rupee rebounds against the US Dollar as the latter retraces after a strong upside move on Monday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects to near 97.30 after posting a fresh weekly high around 97.66.
- The US Dollar faces a slight selling pressure after US President Trump announced reciprocal tariffs on 14 countries, notably Japan and South Korea, on which Washington has imposed 25% tariffs. This has led to a sharp decline in the Japanese Yen (JPY). However, Japanese Prime Minister Shigeru Ishiba said earlier in the day that Tokyo would continue negotiations with the US to seek a mutually beneficial trade deal, Reuters reported.
- Meanwhile, US President Trump has signed orders that confirm the imposition of so-called “Liberation Day” tariffs on August 1, which were previously announced to become effective from July 9. Though the White House has not called it an extension to their tariff deadline, market experts believe that the three-week grace period will provide more time to the US and its trading partners to reach a deal.
- On the domestic front, investors await the release of the Federal Open Market Committee (FOMC) minutes for the June 17-18 policy meeting in which it kept interest rates steady in the range of 4.25%-4.50% for the fourth straight time. During the policy announcement, Fed Chair Jerome Powell warned of stagflation risks, citing that “effects of tariffs will depend on level, and increases this year will likely weigh on economic activity and push up inflation”.
- Meanwhile, traders have pared Fed dovish bets for the policy meeting later this month after the release of the upbeat US Nonfarm Payrolls (NFP) data for June. According to the CME FedWatch tool, the Fed is almost certain to leave interest rates steady in the July meeting.
Technical Analysis: USD/INR aims to stabilize above 20-day EMA
The USD/INR pair oscillates inside Monday’s trading range on Tuesday. The pair tussles to stabilize above the 20-day Exponential Moving Average (EMA), which trades around 85.90. Such a scenario will turn the near-term trend bullish.
The 14-day Relative Strength Index (RSI) rebounds to near 50.00. A fresh bullish momentum would emerge if the RSI breaks above 60.00.
Looking down, the May 27 low of 85.10 will act as key support for the major. On the upside, the June 24 low at 86.42 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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