USD/INR trades in caution at the start of Fed’s decision week
- The Indian Rupee opens cautiously around 88.40 against the US Dollar ahead of the Fed’s interest rate decision.
- The Fed is widely anticipated to cut interest rates by 25 bps to 4.00%-4.25%.
- Inflation in India grew almost in line with expectations in August.
The Indian Rupee (INR) starts the week on a cautious note around 88.40 against the US Dollar (USD), still it is close to its all-time high around 88.60 posted last week. The USD/INR pair is expected to trade on the sidelines, with investors awaiting the Federal Reserve’s (Fed) monetary policy outcome on Wednesday.
According to the CME FedWatch tool, the Fed is certain to cut interest rates by 25 basis points (bps) to 4.00%-4.25%. Therefore, investors will pay close attention to the monetary policy statement and Chair Jerome Powell’s press conference to get cues about the monetary policy action in the remainder of the year.
Analysts at Morgan Stanley have forecasted that the Fed will cut interest rates by 25 bps in all three remaining monetary policy announcements this year, citing downside labor market risks, with threats of high inflation remaining in place.
Latest labor market-related economic indicators have shown signs of a slowing job market in the wake of tariffs imposed by United States (US) President Donald Trump. Last week, Initial Jobless Claims data for the week ending September 5 showed that individuals claiming jobless benefits came in at the highest in four years at 263K.
Daily digest market movers: Investors await India’s WPI inflation data for August
- The resumption of a monetary-easing campaign by the Fed and a dovish interest rate outlook will be a favorable scenario for the Indian Rupee. However, its upside is expected to remain limited due to ongoing trade tensions between the US and India.
- US President Trump has urged the European Union (EU) to exert pressure on India and China to stop them from buying Oil from Russia. Trump has been blaming Asian giants, especially India, for the money that they are paying to Moscow for Oil is being utilized to keep the war going in Ukraine.
- In response to India buying Russian Oil, US President Trump has already increased tariffs on imports from New Delhi to 50%, which has dampened the competitiveness of Indian products in global markets.
- US-India trade tensions have remained a major drag on the sentiment of overseas investors towards India. Foreign Institutional Investors (FIIs) have pared a significant stake of 1,03,813.87 crores in the cash segment of the Indian stock market. However, some signs of slowdown have been observed in the pace of FIIs selling as a significant amount of sell-off was seen in July and August.
- On the domestic front, India’s Consumer Price Index (CPI) data for August has shown that price pressures are increasing at a faster pace. India’s retail inflation rose at an annual pace of 2.07%, almost in line with estimates of 2.1%, and faster than the prior reading of 1.67%. Still, the inflation growth remains below the Reserve Bank of India’s (RBI) target of 3.7% for the current financial year.
- In Monday’s session, investors will focus on the Wholesale Price Index (WPI) Inflation data for August, which will be published at 06:30 GMT. Inflation at the producer level is expected to have grown at an annual pace of 0.3%. In July, the producer inflation data was deflated by 0.58%.
Technical Analysis: USD/INR holds key 20-day EMA
USD/INR opens on a flat note around 88.40 on Monday. 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 14-day Relative Strength Index (RSI) holds above 60.00, suggesting that a fresh bullish momentum is intact.
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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