USD/INR remains firm despite US government shutdown, firm Fed dovish bets
- The Indian Rupee opens flat around 88.90 against the US Dollar, outlook remains weak.
- US-India trade tensions continue to batter the Indian Rupee.
- Weakening US job market and government shutdown have weighed on the US Dollar.
The Indian Rupee (INR) opens on a flat note around 88.90 against the US Dollar (USD) on Friday after a holiday on Thursday. Still, the USD/INR is close to its all-time high of around 89.12 posted last week.
The outlook of the pair remains firm as the delay by the United States (US) and India over reaching a trade agreement has dampened the competitiveness of Indian products in the global market.
Currently, Washington is charging 50% tariffs on imports from New Delhi, one of the highest in the world, which includes a 25% import duty as a penalty for buying Oil from Russia.
Trade tensions between the US and India have been a major drag on the sentiment of overseas investors towards investment in India. In the July-September period, Foreign Institutional Investors (FIIs) have sold equity shares worth Rs. 1,29,870.96 crores in the Indian stock market. FIIs also remained sellers on the first day of October and sold shares worth Rs. 1,605.20 crores.
Meanwhile, the maintenance of a status quo by the Reserve Bank of India (RBI) in the monetary policy meeting announced on Wednesday has also failed to support the Indian Rupee.
On Wednesday, the RBI kept its Repo Rate steady at 5.5%, as expected, and raised Gross Domestic Product (GDP) forecast for the current financial year to 6.8% in the wake of Goods and Services Tax (GST) cuts imposed by the government in late September.
Daily digest market movers: US government closure keeps Greenback on its back foot
- The USD/INR trades broadly firm even as the US Dollar has been on the back foot, following the US government shutdown and weakness in the job market. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades in a tight range around 97.85 after discovering a temporary support near 97.45.
- On Tuesday midnight, Washington went into darkness after Republicans failed to persuade Democrats to support the stopgap bill in the US Senate, which was expected to push the shutdown deadline to November 21.
- US President Donald Trump has blamed Democrats for the government shutdown, and has threatened to halt funding for areas prioritized by them. Trump said on Thursday that he will meet with budget director Russell Vought to discuss Democratic agencies where the White House could cut their funding.
- US President Trump has also warned that the government shutdown will lead to mass firings in federal agencies. White House spokeswoman Karoline Leavitt said this week that Trump could fire thousands of workers.
- Meanwhile, growing acceptance of more interest rate cuts by the Federal Reserve (Fed) in the wake of deteriorating job market conditions. According to the CME FedWatch tool, traders have almost fully priced in a 25 basis points (bps) interest rate reduction by the Fed in the policy meeting later this month. Traders also see an 87% chance that the Fed will also cut interest rates by a similar size in the December meeting.
- On Wednesday, the ADP reported that the private sector removed 32K payrolled workers in September, while it was expected to have hired 50K fresh job-seekers. Historically, the significance of the ADP employment data has remained on market speculation for the Fed’s monetary policy outlook. However, it has increased now as the US Bureau of Labor Statistics (BLS) will not release the official employment data due to the partial government closure.
Technical Analysis: USD/INR consolidates around 88.90
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USD/INR wobbles around 88.90 at open on Friday. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 88.55.
The 14-day Relative Strength Index (RSI) stays above 60.00, suggesting a strong bullish momentum.
Looking down, the pair could slide to near the September 12 high of 88.57 and the 20-day EMA, if it breaks below the September 25 low of 88.76.
On the upside, the pair could extend its rally towards the round figure of 90.00 if it breaks above the current all-time high of 89.12.
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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