USD/INR refreshes monthly high as consistent FIIs selling pushes Rupee on backfoot
- The Indian Rupee depreciates sharply against the US Dollar as FIIs continue to dump Indian equities.
- India signs a free trade deal with the UK, while protecting the interests of domestic farmers.
- The US Dollar rebounds on strong growth in the US private sector activity.
The Indian Rupee (INR) extends its losing streak for the seventh trading day against the US Dollar (USD) on Friday. The USD/INR pair posts a fresh monthly high near 86.70 as the Indian Rupee continues to face selling pressure due to consistent outflow of foreign funds from domestic capital markets.
Currencies of developing economies depend heavily on the flow of foreign funds, and an outflow of a big chunk of them often results in their depreciation.
So far, Foreign Institutional Investors (FIIs) have sold Rs. 28,528.70 crores worth of shares in July. FIIs were also sellers in Thursday’s session, dumping Rs 2,133.69 crores worth of equities.
Moderate corporate earnings growth in the first quarter of the year and a delay in the US-India tariff deal appear to be key reasons that are keeping FIIs away from Indian markets.
Meanwhile, India has signed a Free Trade Agreement (FTA) with the United Kingdom (UK) on Thursday. According to comments from India's Commerce and Industry Minister Piyush Goyal in an interview with News18, the deal will open a significant number of opportunities for domestic farmers. The FTA undertakes zero duties on 95% of agriculture and processed food items, and textiles.
Daily digest market movers: Indian Rupee slumps against US Dollar
- The upside move in the USD/INR pair is also driven by a slight recovery in the US Dollar, which gains ground after correcting for almost a week.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its recovery move to near 97.60.
- The US Dollar attracts bids on upbeat preliminary United States (US) S&P Global Purchasing Managers’ Index (PMI) data for July and increasing hopes that the US and the European Union (EU) will reach a trade agreement soon.
- The initial reaction from the US Dollar was negative after the release of the US private sector activity data, as the Manufacturing PMI surprisingly declined. However, stronger-than-expected growth in the service sector activity offset the impact of an unexpected weakness in the manufacturing sector.
- Hopes of a US-EU trade deal have come as a relief for the US Dollar. A report from the Financial Times (FT) showed on Wednesday that officials from both economies are close to signing a tariff deal, whose terms would mirror the US-Japan pact. Earlier this week, US President Donald Trump confirmed an agreement with Japan and reduced the baseline and automobile tariff rate to 15%.
- Meanwhile, investors brace for significant volatility in the US Dollar as the Federal Reserve (Fed) is scheduled to announce its monetary policy next week, and the August 1 tariff deadline is approaching.
- According to the CME FedWatch tool, the Fed is certain to leave interest rates in the current range of 4.25%-4.50%. Therefore, the major driver for the US Dollar will be commentary from the Fed on the monetary policy outlook for the remainder of the year.
Technical Analysis: USD/INR rises to near 86.70
USD/INR jumps to near 86.70 at open on Friday, the highest level seen in a month. 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) broke above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.
Looking down, the 20-day EMA near 86.40 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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