USD/INR weakens ahead of Indian WPI inflation, US Retail Sales data
- The Indian Rupee gains traction in Monday’s Asian session.
- The weaker US Dollar broadly supports the INR, but higher crude oil prices might cap its gains.
- Investors brace for India’s February WPI inflation and US Retail Sales data, which are due later on Monday.
The Indian Rupee (INR) strengthens on Monday. The concerns about slowing growth in the US economy from US President Donald Trump administration's trade policies weigh on the Greenback and provide some support to the INR. Nonetheless, the upside for the local currency might be limited amid a rise in crude oil prices. It’s worth noting that India is the world's third-largest oil consumer and higher crude oil prices tend to have a negative impact on the INR value.
Looking ahead, India’s February Wholesale Price Index (WPI) inflation will be released later on Monday. On the US docket, Retail Sales data for February will offer cues on US consumer sentiment and whether policy uncertainty has prompted a slowdown in spending. Investors will closely watch the US Federal Reserve (Fed) interest rate decision on Wednesday, which is expected to keep interest rates unchanged. The primary focus will be on the Fed's policy guidance.
Indian Rupee trades with mild gains amid multiple headwinds
- The Indian Rupee is likely to face strong resistance around 86.50 while finding support in the 87.40-50 zone, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.
- India’s economic indicators for February reflect a moderation in inflation, improved industrial output and strong corporate earnings, according to the latest SBI Ecowrap report.
- India is projected to be the world's third-largest economy by 2028 as it becomes the world's most sought-after consumer market and gains share in global output, driven by macro stability influenced policy and better infrastructure, said Morgan Stanley.
- The preliminary reading of the University of Michigan (UoM) Consumer Sentiment Index showed that the index reached its lowest since November 2022, falling to 57.9 from 64.7 in the previous reading. This reading came in below the market consensus of 63.1.
- The UoM five-year Consumer Inflation Expectation jumped to 3.9% in March, compared to 3.5% in February.
- Markets widely expect the Fed will stay on hold when it concludes its two-day meeting on Wednesday. The markets have priced in nearly a 75% odds of a quarter-point reduction to the policy rate by June, according to the CME FedWatch tool.
USD/INR remains capped within a symmetrical triangle
The Indian Rupee trades stronger on the day. The USD/INR pair has consolidated near the lower limit of a symmetrical triangle on the daily chart. The constructive view of the pair remains in place, with the price holding above the key 100-day Exponential Moving Average (EMA). However, further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) stands above the midline, suggesting neutral momentum in the near term.
The immediate resistance level for USD/INR emerges at 87.24, the upper boundary of a symmetrical triangle. Sustained gain above this level could pave the way to 87.53, the high of February 28, en route to an all-time high of 88.00.
On the flip side, a decisive break below the low of March 6 and the lower limit of the triangle pattern at 86.86 could expose 86.48, the low of February 21. Further south, the additional downside filter to watch is 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.
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