The Indian Rupee (INR) holds steady on Monday despite a weaker US Dollar (USD). The decline in crude oil prices, strong foreign institutional inflows (FII) into the Indian stock market and the odds of an outsized Federal Reserve (Fed) rate cut at its upcoming monetary policy meeting on Wednesday might support the INR.
However, the consistent USD buying by importers and risk aversion ahead of the key event could boost the Greenback. Looking ahead, the Indian Trade Balance and US NY Empire State Manufacturing Index are due on Monday. The Indian Wholesale Price Index (WPI) Inflation and US Retail Sales for August will be released on Tuesday. The US Federal Reserve (Fed) interest rate decision will be the highlight on Wednesday.
The Indian Rupee trades flat on the day. The USD/INR pair has broken below an ascending triangle on the daily chart. Nonetheless, in the long term, the pair keeps the bullish vibe as it remains above the key 100-day Exponential Moving Average (EMA). Further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) hovers around the midline, indicating the neutral momentum of the pair.
Sustained upside pressure past the 84.00-84.05 region, the confluence of the psychological figure, the upper boundary of the triangle and the high of September 11 could take USD/INR up to the next upside barriers at 84.50.
On the flip side, the initial support level emerges at 83.84, the low of August 30. A break below this level could pave the way to the 100-day EMA at 83.68.
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.