USD/INR opens higher amid US-India trade tensions, India’s CPI data in focus
- The Indian Rupee opened weak against the US Dollar around 88.50 ahead of India’s CPI data for August.
- US Commerce Secretary Lutnick said that a trade deal with India would likely be reached if it stops buying Russian Oil.
- US Initial Jobless Claims for the week ending September 5 came in at their highest in four years at 263K.
The Indian Rupee opens on a weak note against the US Dollar (USD) on Friday. The USD/INR pair jumps to near 88.50, close to an all-time high around 88.60 posted on Thursday, as trade tensions between the United States (US) and India continue to linger even as Washington and New Delhi have confirmed that trade negotiations between both nations are still going on. They strive to reach an agreement sooner.
Since the announcement of the 90-day grace period by the US for its trading partners to close a trade agreement before the imposition of reciprocal tariffs, Washington mentioned that India could have been the first nation with which it would have closed a deal. However, the deal got postponed due to war tensions between India and Pakistan. And, now India is the nation with facing the highest tariffs by the US for buying Oil from Russia.
The comments from US Commerce Secretary Howard Lutnick, in an interview with CNBC on Thursday, have signaled that Washington is ready to deal with India if it stops buying Russian Oil. "Well, we’re going to sort out India once it stops buying Russian oil,” Lutnick said, Reuters reported.
Additionally, a report from the Financial Times (FT) has indicated that the US will pressure G7 countries to impose higher tariffs on India and China for buying Russian oil.
In response, Foreign Institutional Investors (FIIs) continue to pare stake in Indian stock markets. On Thursday, FIIs sold Rs. 3,472.37 crores worth of shares from the cash segment of Indian equity markets.
On the domestic front, investors await the Consumer Price Index (CPI) data for August, which will be published at 10:30 GMT. Inflationary pressures in the Indian economy are expected to have grown at an annualized pace of 2.1%, faster than the prior reading of 1.55%.
Daily digest market movers: High US inflation and soft job demand suggest stagflation risks
- The upside move in the USD/INR pair is also driven by a steady performance from the US Dollar. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds 0.15% higher to near 97.65 after facing a sharp selling pressure on Thursday.
- The US Dollar declined on Thursday after the US Department of Labor reported a sharp increase in the number of individuals filing for jobless claims for the first time. Initial Jobless Claims for the week ending September 5 came in higher at 263K, the highest reading seen in four years. Economists expect the data to come in at 235K, almost in line with the prior reading of 236K.
- Weakening US labor market conditions had already bolstered market speculation that the Federal Reserve (Fed) will cut interest rates in its policy meeting next week. According to the CME FedWatch tool, traders see a 7.5% chance that the Fed will cut interest rates by 50 basis points (bps) to 3.75%-4.00% on September 17, while the rest point a standard 25-bps interest rate reduction.
- Meanwhile, inflationary pressures in the US economy have accelerated as producers continue to shift the tariff-effect to consumers. As measured by the CPI, the US headline inflation rose at an annual pace of 2.9% in August, as expected, faster than the prior reading of 2.7%. On month, the headline CPI grew at a faster pace of 0.4% against estimates of 0.3% and the prior reading of 0.2%.
- Rising inflationary pressures and weakening job growth have prompted the risk of stagflation in the US economy, a scenario that would force Fed officials to maintain a delicate balancing act in the policy meeting next week.
- In Friday’s session, investors will focus on the preliminary Michigan Consumer Sentiment Index (CSI) data for September, which will be published at 14:00 GMT. The sentiment index is expected to come in slightly lower at 58.0 from 58.2 in August.
Technical Analysis: USD/INR moves higher to near 88.50
The USD/INR pair rises to near 88.50 at open 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 88.00.
The downside move in the 14-day Relative Strength Index (RSI) rebounds from 60.00, suggesting that a fresh bullish momentum has emerged.
Looking down, the 20-day will act as key support for the major. On the upside, the round figure of 89.00 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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