USD/INR corrects as Indian Rupee rebounds, outlook remains positive
- The Indian Rupee bounces back to near 88.80 against the US Dollar, even as the Greenback trades firmly.
- India’s Commerce Minister Goyal stated that New Delhi will increase energy imports from the US.
- Fed’s Daly supports more interest rate cuts.
The Indian Rupee (INR) opens on a slightly positive note against the US Dollar (USD) on Thursday. The USD/INR pair corrects to near 88.80 from the all-time high of 89.12 posted on Wednesday. However, the outlook of the pair remains firm as the continuous outflow of foreign funds from the Indian stock market in the wake of higher tariffs by the United States (US) on imports from India will keep the Indian Rupee on the back foot.
On Wednesday, Foreign Institutional Investors (FIIs) sold shares worth Rs. 2,425.75 crores in the Indian equity market. So far in September, FIIs have pared stake worth Rs. 19,458.68 crores.
Overseas investors have been relentlessly dumping their stake in Indian markets amid trade tensions between the US and India, which escalated after Washington increased tariffs on imports from New Delhi to 50% for buying Oil from Russia.
Meanwhile, India’s Commerce and Industry Ministry Piyush Goyal has visited the US to extend trade talks with top negotiators from Washington, which concluded on a positive note in New Delhi in the third week this month.
According to a video posted by ANI, India’s Commerce Minister Goyal has stated in Washington that New Delhi would increase its trade with the US on energy products in the years to come.
Apart from the imposition of higher tariffs by the US on imports from India, the announcement of an increase in H-1B visa fees by Washington has also weighed heavily on the Indian Rupee. Given the significant dependence of Indian IT firms on business from the US, the overhaul of the H-1B visa fee structure will hit their margins badly.
Daily digest market movers: US Dollar clings to gains ahead of US data-packed day
- The corrective move in the USD/INR appears to be driven by a pullback move in the Indian Rupee on the upside, as the US Dollar trades firmly near its almost two-week high.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near Wednesday’s high around 97.90.
- The US Dollar exhibits strength as Federal Reserve (Fed) Chair Jerome Powell has suggested a measured approach to further interest rate cuts as inflationary pressures remain well above the central bank’s target of 2%.
- Fed Powell’s comments signaled on Tuesday that the monetary policy path will remain on the downside amid growing US labor market concerns. However, he advised caution on further interest rate cuts as near-term risks to inflation are tilted on the upside.
- On Wednesday, San Francisco Federal Reserve Bank President Mary Daly also supported the need to reduce interest rates further to support labor market, but refrained from committing a timeframe. “It is hard to say if further rate cuts will come now, later this year, or when, but we have work to do on inflation, and we don't want the labor market to get weak,” Daly said.
- In the monetary policy announcement last week, the Fed reduced interest rates by 25 basis points (bps) to 4.00%-4.25% and signaled that the Federal Fund Rate could slide to 3.6% by the year-end.
- For fresh cues on inflation, investors await the US Personal Consumption Expenditure Price Index (PCE) data for August, which will be released on Friday.
- In Thursday’s session, investors will focus on US Durable Goods Orders for August, Initial Jobless Claims, and revised Q2 Gross Domestic Product (GDP) data, which will be published at 12:30 GMT.
Technical analysis: USD/INR stays above 20-day EMA
USD/INR retraces to near 88.80 from its all-time high of around 88.10 posted on Wednesday. The upward-sloping 20-day Exponential Moving Average (EMA) near 88.30 signals more upside in the pair.
The 14-day Relative Strength Index (RSI) stays above 65.00, suggesting a strong bullish momentum.
Looking down, the 20-day EMA will act as key support for the major. On the upside, the round figure of 90.00 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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