USD/INR rises at open as tariff-driven inflation strengthens US Dollar
- The Indian Rupee opens lower against the US Dollar as the latter trades firmly after US CPI data for June.
- The impact of Trump’s tariffs has started filtering into prices.
- Investors await the US-Indian trade deal confirmation.
The Indian Rupee (INR) opens on a negative note against the US Dollar (USD) on Wednesday. The USD/INR pair as the US Dollar extends its upside after traders pare Federal Reserve (Fed) dovish bets, following signs from the United States (US) Consumer Price Index (CPI) report for June that tariffs announced by President Donald Trump have started feeding inflation.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near a three-weeks high around 98.60.
The CPI report showed on Tuesday that the headline inflation accelerated at an expected pace on a monthly as well as a yearly basis, while core readings missed estimates. However, they came in higher than the May release. The report also notes that prices of products imported by the US, such as household furnishings, recreation, and apparel, rose sharply as importers started passing on the impact of higher tariffs to consumers, which led traders to reassess their expectations towards the Fed’s monetary policy outlook.
According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September meeting has reduced to 55.5% from 64.7% seen a week ago.
Market experts have also warned that the impact of Trump’s tariffs has still not fully passed into prices as US importers loaded inventories before the announcement of reciprocal levies on so-called “Liberation Day” in April. Also, the impact of tariffs announced on 22 countries and trade deals with a few nations is yet to filter through. The lack of clarity on tariff-led inflation will encourage Fed officials to maintain interest rates at their current levels for longer.
If the recent tariffs threatened for August 1 go into effect, it will take a few months for that additional boost to inflation to be felt in goods prices and will keep the Fed on the sideline unless the labor market takes a sudden turn for the worse," said Ryan Sweet, chief U.S. economist at Oxford Economics, Reuters reported.
Daily digest market movers: Indian Rupee underperforms at the start of Q1 earnings season
- The Indian Rupee underperforms its peers on Wednesday amid fears that the potential trade pact between India and the US could expose domestic companies to severe competition. On Tuesday, US President Trump expressed confidence over closing a deal with India soon after announcing a trade agreement with Indonesia and added that the pact will also allow US companies to gain access to Indian markets.
- The scenario of US companies entering India will be unfavorable for Indian corporations, given that Washington has the competitive advantage of high capital and technology. This could hit business sentiment, impact equity markets, and reduce the flow of foreign investment from direct and institutional investors.
- However, Union Minister Piyush Goyal injected confidence on Tuesday that both nations are working to reach a “win-win” agreement, Financial Express (FE) reported. Goyal added that India’s Chief Trade Negotiator Rajesh Agrawal-led team will hold the next round of trade talks on Wednesday.
- Another reason behind growing pressure on the Indian Rupee is Trump’s threats to impose tariffs on pharmaceuticals by the end of the month. Trump said on Tuesday that he will start with lower tariffs before moving towards higher ones to allow domestic pharmaceutical manufacturers to increase their capacity. Given that India is a key exporter of pharmaceuticals to the US, this scenario will impact Indian pharma companies significantly.
- Meanwhile, Indian indices have opened on a cautious note as the Q1 earnings season has kicked off. Nifty50 opens 0.17% lower at near 25,150. Sensex30 edges down below 82,500.
Technical Analysis: USD/INR revisits three-week high above 86.00
USD/INR reclaims the three-week high of 86.15 on Wednesday after a slight corrective move to near 85.15 the previous day. The near-term trend of the pair remains bullish as it stays above the 20-day Exponential Moving Average (EMA), which trades around 86.00.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting that the asset lacks momentum on either side.
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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