Indian Rupee struggles to extend upside due to renewed concerns over US-Iran deal
- The Indian Rupee hits a roadblock after a four-day rally against the US Dollar.
- US forces launched “self-defense strikes” on Iranian vessels for deploying mines.
- India’s FM Sitharaman assures she will take suggestions regarding higher capital gains taxes.
The Indian Rupee’s (INR) rally against the US Dollar (USD) hits a pause after a four-day winning streak on Tuesday. The USD/INR pair rebounds to near 95.40 as a decent recovery move in oil prices amid fears that the United States (US)-Iran negotiations could face a setback, following Washington’s attacks on Iranian missile sites, has prompted caution among market participants.
As of writing, the WTI Oil price trades 1.5% higher to near $91.00. Currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, face pressure if oil prices rise.
US forces launched defensive strikes on Iran
On Monday, the US Central Command said that it conducted strikes in southern Iran, which were aimed at missile launch sites and Iranian vessels aiming to deploy mines, while clarifying that the nature of the strikes was “defensive” and not meant to end the ceasefire with Tehran.
Meanwhile, US President Donald Trump continues to express confidence that negotiations with Iran towards a permanent resolution are going very well. Trump said on Monday that negotiations toward a deal with Iran to end their conflict and reopen the Strait of Hormuz were "proceeding nicely, Bloomberg reported.
In the past few days, the Indian Rupee gained significantly on hopes of an early breakthrough in the US-Iran negotiations, which led to a sharp decline in oil prices.
FM Sitharaman assures to address concerns regarding Capital Gains Tax
Speaking to reporters on the sidelines of the TEXPROCIL Export Awards Event on Monday, India’s Finance Minister (FM) Nirmala Sitharaman said that the centre will take suggestions from investors regarding higher Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) taxes. "On this specific issue, and on any issue, we are always ready and willing to listen to the people. We will certainly take their inputs,” Sitharaman said, ANI reported.
Market experts believe that higher LTCG and STCG taxes charged by the Indian government in comparison with other nations make India a less attractive investment avenue for foreign investors.
FIIs remained net buyers on Monday
Foreign Institutional Investors (FIIs) turned out to be net buyers in the Indian stock market on Monday after remaining net sellers in all the last four trading days. However, the amount invested by overseas investors was very low against the average selling seen during the May 19-22 period. On Monday, FIIs bought shares worth Rs. 821.75 crore, significantly lower than the four-day average selling of Rs. 2,596.63 crore.
Technical Analysis: USD/INR finds support near 20-day EMA
USD/INR trades marginally higher at around 95.40 in the opening session on Tuesday. The near-term tone of the pair is uncertain as it wobbles around the 20-day exponential moving average (EMA), which is at 95.37.
The Relative Strength Index (RSI) cools down to 54 after failing to hold overbought levels, indicating the conclusion of the positive momentum; however, the bullish bias remains intact.
Looking down, the pair could slide to 95.00 if it fails to hold the 20-day EMA. As long as USD/INR trades above this moving average, dips are likely to find buyers, keeping the near-term bias tilted to the upside. On the upside, the pair would attempt to return to the all-time high around 97.00 if it manages to recover above the May 22 high at 96.37.
(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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