USD/INR trades flat at open as focus shifts to India’s retail inflation data
- The Indian Rupee trades calmly against the US Dollar around 88.85 ahead of India’s retail inflation data for October.
- US President Trump states that he will reduce tariffs on Indian goods at some point.
- The US Senate advances the government funding bill to the House of Representatives.
The Indian Rupee (INR) opens on a flat note against the US Dollar (USD) on Tuesday. The USD/INR pair continues to trade sideways around 88.85 for almost a week as investors await a breakthrough in trade talks between the United States (US) and India.
Negotiators from both nations have been commenting that trade discussions are going well and they are close to reaching a consensus. However, an absence of a deal announcement has kept the Indian Rupee on the back foot.
On Monday, US President Donald Trump reiterated his confidence that Washington and New Delhi are close to a bilateral pact, but did not provide a timeframe. Trump said at “some point” he would reduce the tariff rate on Indian goods, saying the US was getting “pretty close” to a trade deal with New Delhi, Bloomberg reported. He added, “Right now they don’t love me, but they’ll love us again,” and “We’re getting a fair deal”.
Meanwhile, the sentiment of overseas investors towards the Indian stock market remains grim due to a delay in the US-India trade deal announcement. On Monday, Foreign Institutional Investors (FIIs) turned out to be net sellers and sold shares worth Rs. 4,114.85 crore.
Going forward, investors will focus on India’s retail Consumer Price Index (CPI) data for October, which will be released on Wednesday. The inflation data will significantly influence market expectations for the Reserve Bank of India’s (RBI) monetary policy outlook. Economists expect India’s retail inflation to have risen 0.48% on an annualized basis, slower than the 1.54% growth seen in September.
Daily digest market movers: US Senate advances government reopening bill to House
- A quiet opening by the USD/INR pair on Tuesday is also influenced by a stable US Dollar during the Asian session. At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat around 99.65.
- The US Dollar trades calmly following the approval of stopgap funding bill at the Senate to reopen the government after the historically longest shutdown.
- The Senate has advanced the bill to the House of Representatives, which would get passed by Wednesday, according to comments from Speaker Mike Johnson, Reuters reported.
- Meanwhile, investors brace for significant volatility in the US Dollar as the reopening of federal agencies would lead to a flood of economic data releases, which will direct the next move of the Federal Reserve (Fed).
- In the October policy meeting, the Fed stated that the interest rate cut was more a risk management and the December’s decision will be data-dependent.
- Investors will pay close attention to the employment data to get cues about the hiring trend. Latest commentaries from Fed officials signaled that they are cautious about weakening labor market conditions. Signs of softer job demand would boost expectations of more interest rate cuts by the Fed this year.
- Currently, the CME FedWatch tool shows that the probability of the Fed cutting interest rates in the December meeting is 62.4%.
Technical Analysis: USD/INR remains sideways near 88.85
The USD/INR pair remains confined in a tight range near 88.85. The pair stays above the 20-day Exponential Moving Average (EMA), which trades around 88.63.
The 14-day Relative Strength Index (RSI) strives to return above 60.00. A fresh bullish momentum would emerge if the RSI (14) manages to do so.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the all-time high of 89.12 will be a key barrier.
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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