The Indian Rupee (INR) edges higher against the US Dollar (USD) at the start of the week. The USD/INR pair drops to near 88.25 after posting a fresh all-time high slightly above 88.50 on Friday. The pair retraced quicky from its all-time high, following likely intervention of Reserve Bank of India (RBI) to support the Indian Rupee, according to a report from Reuters.
The outlook of the Indian Rupee remains vulnerable as Foreign Institutional Investors (FIIs) continue to pare stake from Indian stock market due to ongoing trade tensions between the United States (US) and India. In August, Washington raised tariffs on imports from New Delhi to 50% for buying Oil Russia, which US President Donald Trump called as the scenario is funding Moscow for continuing war in Ukraine.
However, on Friday, the comments from US President Trump signaled that he could mend fences with India. Trump said while responding to reporters that India and the US have a special relationship and there’s nothing to worry about the ties between nations. These comments from Trump came after reporters asked about whether he wants to reset relations with India.
On Friday, FIIs sold Indian equities worth Rs. 1,304.91 crores. In September, overseas investors have pared stake worth Rs. 5,666.901 crores. Foreign investors have extended their sell-off for the third month in a row. In July and August, FIIs sold equities worth Rs. 94,569.6 crores cumulatively.
The USD/INR pair corrects to near 88.25 from its all-time high posted on Friday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 87.80.
The 14-day Relative Strength Index (RSI) trades calmly above 60.00, suggesting that a fresh bullish momentum has come into effect.
Looking down, the 20-day will act as key support for the major. On the upside, the pair has entered an uncharted territory. The round figure of 89.00 would be the key hurdle for the pair.
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.