USD/INR trades with mild volatility ahead of US-India trade talks
- The Indian Rupee trades flat around 88.30 against the US Dollar ahead of trade discussions between the US and India.
- Washington receives 50% tariffs on imports from India into the US.
- The Fed is expected to reduce borrowing rates on Wednesday.
The Indian Rupee (INR) opens almost flat at around 88.30 against the US Dollar (USD) on Tuesday. The USD/INR pair is expected to face sharp volatility as top negotiators from India and the United States (US) are scheduled to discuss trade in New Delhi on Tuesday.
Trade relations between India and the US have not been good in the past few months as President Donald Trump has criticized New Delhi for buying Oil from Russia, which he called that Moscow is utilizing the money for funding the war in Ukraine. Additionally, Trump also raised tariffs on India to 50%, making Indian products less competitive in global markets.
Ahead of US-India trade discussions, Washington’s trade adviser Peter Navarro said in an interview with CNBC on Monday that India was "coming to the negotiating table". He also acknowledged the exchange of tweets between President Trump and India’s Prime Minister Narendra Modi happened last week, which signaled that both nations continue to negotiate on trade and expressed confidence that they will reach a deal soon.
"India is coming to the table. PM Modi sent out a very conciliatory, nice, constructive tweet, and President Trump responded to that. We'll see how this works,” Navarro.
The confirmation of a trade truce between the US and India would be favorable for the Indian Rupee in times when the Asian giant is going through structural reforms to steadfast its domestic consumption. Earlier this month, the Indian government unveiled a new Goods and Services Tax (GST) bill in which tax slabs were brought down to two from four.
Daily digest market movers: The Fed seems certain to cut interest rates on Wednesday
- The USD/INR pair trades calmly around 88.30, even as the US Dollar faces selling pressure, suggesting a significant weakness in the Indian Rupee. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% lower to near 97.20, the lowest level seen in three weeks.
- The US Dollar remains on the back foot as the Federal Reserve (Fed) is certain to start the monetary-easing cycle in its policy announcement on Wednesday. According to the CME FedWatch tool, there is a 96% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.00%-4.25%, while the rest support a bigger reduction of 50 bps.
- As the Fed is widely anticipated to reduce interest rates, the major trigger for the US Dollar will be the monetary policy statement and Chair Jerome Powell’s speech to get cues about the outlook of interest rates for the remainder of the year and the labor market.
- Fed dovish speculation has been intensified by escalating US labor market risks. Last week, Initial Jobless Claims data for the week ending September 5 showed that individuals claiming jobless benefits came in the highest in four years at 263K.
- In Tuesday’s session, investors will focus on the US Retail Sales data for August, which will be published at 12:30 GMT. The US Retail Sales data is expected to come in lower at 0.3% on a monthly basis, against the prior release of 0.5%.
- Meanwhile, the US Senate narrowly confirmed President Donald Trump’s chosen economic adviser Stephen Miran as a member of the Fed’s Board of Governors ahead of the policy decision. Miran was placed on the Fed’s board after member Adriana Kugler unexpectedly resigned in early August.
Technical Analysis: USD/INR sees upside if RSI rebounds from 60.00
The USD/INR pair trades flat around 88.30 in the opening session on Tuesday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 88.03.
The 14-day Relative Strength Index (RSI) falls to near 60.00. A fresh bullish momentum would emerge if the RSI rebounds from that level.
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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