USD/INR corrects as Indian Rupee snaps five-day losing streak
- The Indian Rupee opens positively against the US Dollar amid upbeat market mood.
- Hopes of a US-EU trade agreement have lifted market sentiment.
- Investors await the preliminary India-US PMI data for July.
The Indian Rupee (INR) opens on a positive note against the US Dollar (USD) on Thursday after a five-day losing streak. The USD/INR pair slides to near 86.45 as the market sentiment turns upbeat, following hopes that the United States (US) and the European Union (EU) are close to reaching a trade agreement ahead of the August 1 tariff deadline.
A report from Financial Times (FT) showed on Wednesday that Washington and Brussels will strike an agreement, which will include 15% tariffs on imports from the European Union (EU). The report also showed that the shared continent accepted a higher baseline tariff rate to avert a damaging trade war, according to an EU official, following the announcement of the US-Japan trade agreement on Tuesday in which Washington slashed the baseline and automobile levy to 15% from 25%.
A few weeks back, US President Donald Trump sent a letter to the European Commission (EC), dictating a 30% tariff rate, for failing to reach a trade pact during the 90-day pause period.
The closure of trade pacts by the US with its key trading partners has diminished upside risks to global trade. This has led to a decline in demand for safe-haven assets. The US Dollar has also extended its downside on hopes of the US-EU trade deal. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto losses near a fresh over two-week low around 97.15 posted on Wednesday.
Daily digest market movers: Investors await flash India-US PMI data for July
- A positive opening by the Indian Rupee on Thursday is purely driven by upbeat market sentiment. However, it is doubtful whether the Indian currency will hold the recovery as Foreign Institutional Investors (FIIs) continue to pare their stake in equity markets.
- Indian bourses saw an outflow of Rs. 4,209.11 crores worth of foreign investment on Wednesday, while indices extended their recovery move seen initially on Monday. So far, FIIs have sold Rs. 26,395.01 crores worth of equities in July.
- Meanwhile, investors await preliminary India’s HSBC Purchasing Managers’ Index (PMI) data for July, which will be published at 05:00 GMT. The PMI data will show whether the overall business activity was impacted by global trade uncertainty, which is driven by the US tariff policy.
- On Wednesday, the Reserve Bank of India’s (RBI) monthly bulletin report for June showed that the overall business activity remained resilient due to a strong momentum in the services sector and summer-sown crops. However, the growth in industrial activity remained modest. Meanwhile, the Indian central bank has advised caution in financial market sentiment due to uncertainty in India-US trade agreement and mixed corporate earnings in the first quarter of the year.
- In Thursday’s session, the flash US S&P Global PMI data for July will also remain on investors’ radar, which will be published at 13:45 GMT. The US PMI report is expected to show that overall business activity grew at a faster pace, driven by expansion in both manufacturing and the services sector.
Technical Analysis: USD/INR retraces to near 86.40
USD/INR corrects to near 86.40 at open on Thursday after refreshing the monthly high around 86.65 the previous day. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 86.15.
The 14-day Relative Strength Index (RSI) strives to break above 60.00. A fresh bullish momentum would emerge if the RSI breaks above that level.
Looking down, the 50-day EMA near 85.85 will act as key support for the major. On the upside, the June 23 high near 87.00 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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