USD/INR holds last week’s gains-driven by RBI’s double intervention
- The Indian Rupee trades firmly against the US Dollar near 90.00 at the start of the week.
- The RBI has intervened to support the Indian Rupee, and FIIs have remained net buyers in the December 17-19 period.
- Fed’s Hammack stresses against further interest rate cuts, citing that November’s CPI data was distorted.
The Indian Rupee (INR) holds onto last week’s gains against the US Dollar (USD) at the start of the week. The USD/INR pair clings to losses near 90.00, driven by the Reserve Bank of India’s (RBI) intervention in the spot and non-deliverable forward (NDF) market to support the Indian Rupee.
Last week, the RBI sold US Dollars in the opening trade on Wednesday and in closing trading hours on Friday to cushion the Indian Rupee against its one-way depreciation against the USD. The Indian currency has declined almost 6.5%, so far this year, against the US Dollar.
The major drivers behind strength in the USD/INR this year are strong demand for US Dollars by Indian importers and the continuous outflow of foreign funds from the Indian stock market amid trade frictions between the United States (US) and India.
In the cash market, Foreign Institutional Investors (FIIs) have remained net sellers in seven out of 11 months this year. So far this month, FIIs have also offloaded their stake worth Rs. 19,857.37 crore. However, some sort of buying has been seen by overseas investors in the last three trading days. FIIs have remained net buyers in only the past three trading days this month, and have bought a stake worth Rs. 3,598.38 crore.
Daily Digest Market Movers: Fed’s Hammack argued against reducing interest rates at least before spring
- The US Dollar struggles to regain ground against the Indian Rupee after posting a fresh three-week low near 89.50 on Friday, even as the former trades broadly stable against its major peers amid expectations that the Federal Reserve (Fed) will not cut interest rates in its January policy meeting.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally lower around 98.60.
- According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 25 basis points (bps) to 3.25%-3.50% in the January meeting is 22.5%.
- Fed dovish expectations for the January meeting have not accelerated despite the US Consumer Price Index (CPI) data for November showing that inflationary pressure cooled down.
- The data on Thursday showed that the headline inflation cooled down to 2.7% year-on-year (YoY) from 3% in October. In the same period, the core CPI – which strips off volatile food and energy items – cooled down to 2.6% from estimates and the prior reading of 3%.
- On Friday, Cleveland Fed President Beth Hammack stated in a podcast interview with the Wall Street Journal (WSJ) that there is no need to change interest rates at least until the spring, while stressing the need for evidence supporting progress in inflation towards 2%. She added that the significance of November’s inflation reading is limited as the data was distorted due to the government shutdown.
- “My base case is that we can stay here for some period of time, until we get clearer evidence that either inflation is coming back down to target or the employment side is weakening more materially,” Hammack said.
- Going forward, the major trigger for the US Dollar will be the preliminary Q3 Gross Domestic Product (GDP) data, which will be published on Tuesday.
Technical Analysis: USD/INR falls below 20-day EMA
USD/INR trades cautiously near 90.0440 at the start of the week. The 20-day Exponential Moving Average rises, though price has slipped marginally below it at 90.1601, tempering near-term upside after a firm climb. The rising trend line from 83.9122 underpins the broader bias, with support aligned near 89.1107.
The 14-day Relative Strength Index (RSI) at 51 (neutral) confirms momentum has cooled from recent overbought readings.
Upside traction would improve on a sustained close back above the 20-day EMA that could press the price to revisit the all-time high near 91.50. Looking down, a break beneath the ascending trend line could open the door to a deeper pullback toward the November low of 88.49.
(The technical analysis of this story was written with the help of an AI tool.)
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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