USD/INR rises at open ahead of India’s retail inflation data
- The Indian Rupee weakens against the US Dollar at open ahead of India’s retail CPI data for October.
- FIIs continue to dump their stake in the Indian stock market.
- Weak US job trend has prompted Fed dovish speculation.
The Indian Rupee (INR) opens on a weak note against the US Dollar (USD) on Wednesday. The USD/INR pair rises to near 88.80 as the Indian Rupee underperforms ahead of the release of India’s Consumer Price Index (CPI) data for October at 10:30 GMT.
Economists expect India’s retail inflation to have grown 0.48% on an annualized basis, slower than 1.54% growth seen in September. The expectations of a soft CPI figure are driven by a sustained fall in food prices.
According to analysts at Bank of America (BofA), “Base effects are most supportive in this month, as it mirrors the sharp increase in vegetable prices we had seen in October last year”.
Signs of price pressures cooling would boost expectations of further monetary policy easing by the Reserve Bank of India (RBI) this year. So far this year, the RBI has already reduced its Repo Rate by 100 basis points (bps) to 5.5%.
Meanwhile, the continuous outflow of foreign funds from the Indian stock market due to an absence of a United States (US)-India trade deal announcement has been keeping the Indian Rupee on the back foot. On Tuesday, Foreign Institutional Investors (FIIs) turned out to be net sellers again and sold shares worth Rs. 803.22 crore.
Daily digest market movers: Weak ADP Employment data prompts Fed dovish bets
- The Indian Rupee trades lower against the US Dollar, even as the latter trades cautiously due to intensifying market expectations of an interest rate cut by the Federal Reserve (Fed) in the December policy meeting.
- According to the CME FedWatch tool, the probability of the Fed to cut interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has increased to 68% from 62.4% seen on Monday.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 99.55. On Tuesday, the USD Index fell sharply after the release of the soft ADP Employment Change four-week average data, which prompted Fed dovish expectations.
- Private payroll processor ADP reported that employers laid off 11.25K workers each week through late October, demonstrating a weak job trend. "The labor market struggled to produce jobs consistently during the second half of the month," said Nela Richardson, ADP’s chief economist.
- The impact of the job data has been significant on Fed’s interest rate projections lately as officials have warned of downside labor market risks.
- Going forward, investors will focus on a slew of US economic releases, which were halted to the government shutdown. On Tuesday, the US Senate advanced federal funding bill to the Republican-controlled House of Representatives, which is expected to get passed on Wednesday.
Technical Analysis: USD/INR stays above 20-day EMA
USD/INR rises to near 88.80 at open on Wednesday. The near-term trend of the pair remains bullish as it stays above the 20-day Exponential Moving Average (EMA), which trades around 88.65.
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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