USD/INR extends losing streak on US-India trade deal optimism, Fed policy eyed
- The Indian Rupee jumps to near 87.90 against the US Dollar as both the US and India signal optimism on a trade deal.
- US President Trump appreciated Indian PM Modi’s efforts to end Russia-Ukraine war.
- Investors are certain that the Fed will cut interest rates on Wednesday.
The Indian Rupee (INR) extends its upside against the US Dollar (USD) for the fourth trading day in a row on Wednesday. The USD/INR pair posts a fresh two-week high around 87.90 as the Indian Rupee strengthens, following signals from United States (US) President Donald Trump and India’s Prime Minister Narendra Modi that they will reach a trade agreement soon.
On Tuesday, US President Trump stated through a post on Truth.Social that he had a positive call with India’s PM Modi over bilateral relations and thanked him for his efforts towards ending the war between Russia and Ukraine. Before Trump’s post, Modi also stated that India supports President Trump’s initiatives towards a “peaceful resolution of the Ukraine conflict”.
These comments came after top negotiators from the US and India had trade talks in New Delhi. A spokesperson from the US embassy stated that Washington had a positive meeting with India’s chief negotiator Rajesh Aggarwal on bilateral trade. Both nations didn’t provide clarity on trade terms and when they could reach an agreement, but hinted that they would continue discussing trade virtually.
Positive comments from Washington and New Delhi on trade are favorable for the Indian Rupee, as the currency came out as a major victim of trade tensions between both nations. Trade relations between the US and India were badly impacted after President Trump increased tariffs on New Delhi to 50% for buying Oil from Russia.
Increasing hopes of a trade truce between the US and India have also led to a slowdown in selling from overseas investors in Indian stock markets. So far in September, Foreign Institutional Investors (FIIs) have sold equity shares worth Rs. 10,204.54 crores. In August and July, FIIs pared stake worth Rs. 46,902.92 and 47,666.68 crores, respectively.
Daily digest market movers: Fed dovish bets batter US Dollar
- The downside move in the USD/INR pair is also driven by a significant weakness in the US Dollar. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to a fresh two-month low around 96.70 posted on Tuesday.
- The US Dollar has been hit hard due to firm expectations that the Federal Reserve (Fed) will start the monetary-easing campaign in its policy announcement at 18:00 GMT. According to the CME FedWatch tool, there is a 96% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.00%-4.25%, while the rest support a bigger reduction of 50 bps.
- More than the Fed’s interest rate decision, investors will focus on the dot plot, which shows where policymakers see borrowing rates heading in the near and long term. According to analysts from Barclays, the Fed’s latest median projections for interest rates are likely to call for three interest rate cuts by 2025.
- Apart from the Fed’s interest rate projections, investors will also focus on Chair Jerome Powell’s press conference to know about the labor market outlook and whether tariffs stand a chance to boost inflationary pressure further in the near term.
- Meanwhile, Fed Governor Lisa Cook is set to participate in Wednesday’s policy meeting as a US appeals court has blocked US President Trump’s decision to fire Cook over mortgage allegations.
- On the economic data front, US Retail Sales have grown steadily by 0.6% in August, faster than expectations of 0.2%.
Technical Analysis: USD/INR falls to near 20-day EMA
USD/INR slides to near 87.90 on Wednesday, the lowest level seen in two weeks. The pair has corrected to near the 20-day Exponential Moving Average (EMA), which is around 88.00, suggesting uncertainty in the near-term trend.
The 14-day Relative Strength Index (RSI) declines to near 50.00, indicating that the bullish momentum has run its course for now. However, the bullish bias remains intact.
Looking down, the August 28 low of 87.66 will act as key support for the major. On the upside, the September 11 high of 88.65 would be the key 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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