USD/INR remains strong ahead of US Retail Sales release
- The Indian Rupee drifts lower in Thursday’s Asian session.
- Higher oil prices and persistent outflows weigh on the INR, but weaker USD and RBI’s intervention might cap its downside.
- Investors await the US December Retail Sales and weekly Initial Jobless Claims releases on Thursday for fresh impetuses.
The Indian Rupee (INR) trades in negative territory on Thursday. A surge in crude oil prices exerts some selling pressure on the local currency as India relies on overseas suppliers for almost 90% of its oil consumption. Furthermore, continued outflows from foreign investors and concerns about India’s economic slowdown contribute to the INR’s downside.
However, the cooler-than-expected US inflation data raises the bet that the US Federal Reserve (Fed) could cut interest rates twice this year. This, in turn, could weigh on the US Dollar (USD) and support the INR. The routine intervention from the Reserve Bank of India (RBI) also helps limit the local currency’s losses. The Indian central bank has regularly intervened to prop up the currency, burning through almost $70bn of its foreign exchange reserves since they reached a record high of $705bn in September 2024. Investors brace for the US Retail Sales for December and weekly Initial Jobless Claims, which are due later on Thursday.
Indian Rupee remains vulnerable amid a rise in crude oil prices and foreign fund outflows
- India's economy is expected to become the fourth largest in the world by 2026, surpassing Japan, according to the PHDCCI on Wednesday. It projected the nation's GDP to grow 6.8% in the current financial year ending March and 7.7% in FY26.
- India’s trade deficit narrowed to $21.94 billion in December from $37.84 billion in November, led by a sharp decline in gold and oil import bills, data released by the Ministry of Commerce and Industry showed on Wednesday.
- The US Consumer Price Index (CPI) climbed 2.9% YoY in December, compared to 2.7% in November, according to the Bureau of Labor Statistics on Thursday. This reading came in line with market expectations.
- The US core CPI, which excludes volatile food and energy prices, rose 3.2% YoY in December, below the previous reading and the market consensus of 3.3%.
- According to the Fed’s Beige Book survey released on Wednesday, economic activity increased “slightly to moderately” across the US in late November and December, supported by strong holiday sales.
USD/INR paints a positive picture, overbought RSI warrants caution for bulls in the near term
The Indian Rupee weakens on the day. The bullish outlook of the USD/INR pair prevails as the price has formed higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. Nonetheless, further consolidation cannot be ruled out in the near term as the 14-day Relative Strength Index (RSI) moves beyond the 70.00 mark. This suggests an overbought condition and warrants some caution for bulls.
The first upside barrier for USD/INR emerges at an all-time high of 86.69. Extended gains could see a rally to the 87.00 psychological level.
On the other hand, the initial downside target to watch is 86.12, the low of January 13. Any follow-through selling below this level could pave the way to 85.85, the low of January 10. The next contention level is seen at 85.65, the low of January 7.
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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