USD/INR extends upside on foreign fund outflows, US Dollar demand

Source Fxstreet
  • The Indian Rupee weakens in Tuesday’s Asian session. 
  • Significant foreign fund outflows and strength in the US Dollar weigh on the INR. 
  • The RBI intervention might help limit the INR’s losses. 

The Indian Rupee (INR) depreciates on Tuesday. Analysts expect the local currency to trade with negative bias amid weakness in the domestic equities and Foreign Institutional Investors (FII) outflows. A recovery in the US Dollar (USD) and fears of a global trade war in response to Trump's tariff measures might contribute to the INR’s downside. 

Nonetheless, any significant decline in the INR might be capped amid further intervention by the Reserve Bank of India (RBI). Investors await the release of the NY Empire State Manufacturing Index for February, which will be released later on Tuesday. Also, the Federal Reserve's (Fed) Mary Daly is set to speak. 

Indian Rupee remains vulnerable amid FII outflows

  • India's trade deficit widened to $22.99 billion in January from December's $21.94 billion, according to government data on Monday.
  • India’s Exports stood at $36.43 billion in January, while Imports rose to $59.4 billion during the same reported period, said the government data.
  • The narrowing of the trade deficit was likely influenced by a decline in gold imports, as higher global prices reduced demand, according to a Union Bank of India report.
  • "The Indian rupee declined today on a weak tone in the domestic markets and a recovery in the US dollar index from intraday lows. However, a weak tone in crude oil prices and a decline in US Treasury yields cushioned the downside," said Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan.
  • On Friday, US President Donald Trump maintained his drumbeat of tariff threats, stating that taxes on autos will begin as soon as April 2. It was the latest in a series of trade measures he has announced since taking office for the second time.

USD/INR’s broader trend remains constructive

The Indian Rupee trades on a softer note on the day. According to the daily chart, the USD/INR pair keeps the bullish vibe as the price is above the key 100-day Exponential Moving Average (EMA). Furthermore, upward momentum is supported by the 14-day Relative Strength Index (RSI), which stands above the midline near 55.0, hinting that the path of least resistance is to the upside. 

The first upside barrier for USD/INR emerges at the 87.00 psychological level. A decisive break above this level, the pair could set its sights back up on an all-time high near 88.00, en route to 88.50. 

In the bearish event, the initial support level is located at 86.35, the low of February 12. A breach of the mentioned level could set off a drop to 86.14, the low of January 27.  

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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