USD/INR extends rally ahead of Fed rate decision
- The Indian Rupee weakens in Wednesday’s early Asian session.
- USD demand and cautious mood might undermine the INR, while lower crude oil prices and RBI intervention could limit losses.
- Investors will closely monitor the Federal Reserve’s (Fed) interest rate decision on Wednesday.
The Indian Rupee (INR) edges lower on Wednesday. The weakness of local currency is largely driven by persistent US Dollar (USD) high demand for month-end payments, dragging the INR lower near record lows over the last few trading sessions. The cautious mood and escalating geopolitical tensions in the Middle East could weigh on the INR.
However, a further decline in crude oil prices could support the Indian Rupee as India is the third largest consumer of oil behind the US and China. The volatility might be limited as the Reserve Bank of India (RBI) is expected to continue intervening to limit sudden depreciation.
The US Federal Reserve (Fed) is widely anticipated to hold the interest rate in the range of 5.25%-5.50% at its two-day FOMC meeting that concludes on Wednesday. Traders will keep an eye on Fed Chair Jerome Powell’s press conference, which might offer some hints about the Fed’s potential rate cut plans. On the Indian docket, the final reading of HSBC Manufacturing PMI will be published on Thursday, which is projected to improve to 58.5 in July from the previous reading of 58.3.
Daily Digest Market Movers: Indian Rupee remains vulnerable near record lows
- Foreign investors invested in Indian shares for about $509.9 million on July 26, while withdrawing from Indian bonds the same day for around $78.7 million.
- The RBI has implemented additional restrictions on foreign ownership of newly issued bonds. The focus is on the billions of dollars flowing into the local market due to the inclusion of Indian bonds in JPMorgan's emerging market index, per Bloomberg.
- The US Job Openings and Labor Turnover Survey (JOLTS) reported 8.184 million job openings in June, above the market expectation of 8.03 million but lower than May’s revised figure of 8.23 million.
- US Consumer Confidence rose to 100.3 in July from the revised figure of 97.8 in June. This figure came in above the market consensus of 99.7, according to the Conference Board on Tuesday.
- With inflation easing faster than estimated in June, the markets have priced in nearly a 64% chance that the Fed will cut rates three times this year — September, November and December, according to the CME FedWatch.
Technical analysis: USD/INR’s positive outlook remains in play
Indian Rupee trades softer on the day. The outlook for the USD/INR pair appears to be bullish on the daily timeframe, as the pair has held above the key 100-day Exponential Moving Average (EMA) and is depicted by an uptrend line since June 3. Additionally, the 14-day Relative Strength Index (RSI) points higher above the midline near 60.25, showing signs of bullish momentum.
The crucial resistance level will emerge at the all-time high of 83.85. A decisive break above this level could pave the way to the 84.00 psychological level.
Sustained trading below the uptrend line around 83.72 could see further downside towards 83.51, a low of July 12. Any follow-through selling will expose 83.44, the 100-day EMA.
US Dollar price today
The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Australian Dollar.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.02% | -0.04% | -0.03% | 0.01% | -0.21% | -0.10% | -0.03% | |
| EUR | 0.01% | -0.01% | 0.00% | 0.03% | -0.18% | -0.05% | -0.01% | |
| GBP | 0.03% | 0.00% | 0.00% | 0.03% | -0.17% | -0.05% | -0.01% | |
| CAD | 0.02% | 0.00% | 0.00% | 0.02% | -0.18% | -0.05% | 0.02% | |
| AUD | -0.02% | -0.04% | -0.03% | -0.04% | -0.22% | -0.09% | -0.02% | |
| JPY | 0.19% | 0.18% | 0.20% | 0.17% | 0.25% | 0.16% | 0.20% | |
| NZD | 0.08% | 0.05% | 0.05% | 0.04% | 0.10% | -0.12% | 0.11% | |
| CHF | 0.01% | -0.02% | -0.03% | -0.02% | 0.00% | -0.15% | -0.06% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
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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