USD/INR advances as Trump signals higher import duty on India
- The Indian Rupee slumps against the US Dollar as US President Trump signals a higher import duty rate for India.
- Trump signaled the possibility of a 20%-25% import duty on India.
- Investors await Fed’s monetary policy decision and key US data.
The Indian Rupee (INR) extends its downside against the US Dollar (USD) at open on Wednesday, sliding to near 87.30. The USD/INR pair was anticipated to gain further as the Indian Rupee weakens, following comments from United States (US) President Donald Trump pointing out that exports from India could face tariffs ranging between 20% and 25%.
On Tuesday, US President Trump said, “I think so” while responding to reporters after they asked about the possibility of 20%-25% tariffs on imports from India.
Such a scenario is unfavorable for the Indian Rupee as the tariff rate signaled by President Trump is significantly higher than what he has agreed to in deals with Indonesia, Vietnam, Japan, and the European Union (EU). A higher import duty on goods from India could diminish the competitiveness of Indian exports in the international market.
Meanwhile, President Trump also stated that tariffs charged by New Delhi on imports from Washington have been significantly higher than those charged by other countries, and this should come to an end.
The Indian Rupee has remained an underperformer this week as Foreign Institutional Investors (FIIs) have sold their stakes in Indian equity markets relentlessly. So far, FIIs have sold Rs. 41,227.73 crores worth of shares in Indian bourses. On Tuesday, there was an outflow of Rs. 4,636.60 crores worth of shares by foreign portfolio investors in the cash market.
A significant weakness in the Indian currency against the US Dollar has paved the way for the Reserve Bank of India’s (RBI) intervention into the Forex markets. A report from Reuters showed that the Indian central bank will likely sell US Dollars to limit Rupee depreciation.
Daily digest market movers: Indian Rupee continues to underperform against US Dollar
- An outperformance by the US Dollar, following the announcement of a tariff deal between the US and the European Union (EU), has also been a key factor behind the sheer strength in the USD/INR pair.
- This weekend, officials from both sides of the Atlantic approved a trade agreement, which diminished fears of global trade disruption.
- Meanwhile, investors have shifted their focus to the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT. According to the CME FedWatch tool, the Fed is certain to leave interest rates steady in the range of 4.25%-4.50%. This would be the fifth straight policy meeting when the US central bank will hold borrowing rates at their current levels.
- As the Fed is expected to maintain the status quo, the major trigger for the US Dollar will be the central bank’s guidance on inflation and the interest rate outlook for the remainder of the year.
- Lately, a string of Fed officials warned that the impact of tariffs imposed by US President Trump has started feeding into prices, which diminishes the appeal of monetary policy adjustments in the current scenario. Fears of a resurgence in price pressures escalated after the Consumer Price Index (CPI) report for June showed that prices of goods that are largely imported into the economy have increased.
- In Wednesday’s session, investors will also focus on the preliminary Q2 Gross Domestic Product (GDP) and Personal Consumption Expenditure Price Index (PCE) data, which will be published at 12:30 GMT.
Technical Analysis: USD/INR trades firmly above 20-day EMA
The USD/INR pair trades close to a fresh four-month high near 87.30 on Wednesday. The pair trades firmly as the 20-day Exponential Moving Average (EMA) slopes higher to near 86.45, indicating a strong uptrend.
The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting a strong bullish momentum
Looking down, the 20-day EMA will act as key support for the major. On the upside, the February 28 high around 87.70 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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