USD/INR corrects even as US-India trade tensions escalate
- The Indian Rupee bounces back against the US Dollar despite trade tensions between the US and India escalating.
- Washington continues to criticize New Delhi for buying crude oil from Russia.
- Investors await key US economic data for July.
The Indian Rupee (INR) extends its recovery against the US Dollar (USD) for the second trading day on Friday. The USD/INR pair retraces to 87.40 from the five-month high of 88.00 posted on Wednesday, even as trade tensions between the United States (US) and India have escalated, and foreign portfolio investors continue to pare investments from Indian equity markets.
The comments from US Treasury Secretary Scott Bessent in an interview with CNBC signaled that trade disputes between Washington and New Delhi are unlikely to be resolved in the near term, criticizing India for buying a significant amount of crude Oil from Russia.
“India has been a large buyer of sanctioned Russian oil that they then resell as refined products. So, you know, they have not been a great global actor,” Bessent said. He added that Washington’s trade team has also been frustrated with New Delhi for rolling things slowly.
Trade tensions between the US and India came under the spotlight after President Donald Trump, through a post on Truth.Social, announced 25% tariffs on imports from New Delhi, along with an unspecified penalty for buying Russian military equipment and energy products on Wednesday.
Meanwhile, a significant amount of foreign outflow from Indian markets has also weighed heavily on the Indian currency. The data showed on Thursday that Foreign Institutional Investors (FIIs) sold equity shares worth Rs. 47,666.68 crores in July, the amount is more than double their cumulative buying in the last four months. FIIs remained net buyers in the cash market only in five trading sessions in July.
Daily digest market movers: Indian Rupee recovers against US Dollar
- The Indian Rupee rebounds against the US Dollar even as the latter performs strongly against its major peers. The USD gains further on Thursday after the Personal Consumption Expenditure Price Index (PCE) report for June signaled that price pressures grew at a faster pace, a trigger that often supports the argument in favor of keeping a restrictive monetary policy stance by the Federal Reserve (Fed).
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near a fresh two-month high around 100.00.
- The data showed that the core PCE inflation, which is the Fed’s preferred inflation gauge, rose steadily by 2.8% on year, faster than expectations of 2.7%. On month, the underlying inflation grew by 0.3%, as expected, faster than the prior reading of 0.2%.
- Signs of price pressures remaining elevated forced traders to accelerate bets supporting the Fed to leave interest rates in the current range of 4.25%-4.50% in the September meeting. According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September meeting has diminished to 41.2% from 46.7% seen on Wednesday.
- Traders pared Fed dovish bets significantly on Wednesday after Chair Jerome Powell signaled that there is no rush for interest rate cuts, citing upside inflation risks.
- Meanwhile, investors await the US Nonfarm Payrolls (NFP) and ISM Manufacturing Purchasing Managers’ Index (PMI) data for July, which will be published during the North American session. The US economy is expected to have added 110K fresh workers, lower than 147K in June. The ISM Manufacturing PMI is seen higher at 49.5 from 49.0 in June, suggesting that activities continued to decline but at a moderate pace.
- On the global front, US President Trump, on Thursday, unveiled tariff rates for countries that have failed to make a deal with Washington as the deadline ends. However, a 90-day grace period has been provided to Mexico amid ongoing trade negotiations between the two countries.
Technical Analysis: USD/INR stays above 20-day EMA
USD/INR falls back to near 87.40 at open on Friday. The pair has retraced from its five-month high of 88.00 posted on Wednesday. However, the near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 86.70.
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 10 high around 88.15 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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