USD/INR holds steady despite softer US Dollar
- Indian Rupee trades flat in Monday’s Asian session.
- Mounting concerns about US fiscal health and weaker US Dollar support the INR.
- RBI rate cut bets and higher crude oil prices might cap the INR’s upside.
The Indian Rupee (INR) flat lines on Monday after hitting its best performance in more than two years in the previous session. According to Bloomberg, the Indian currency’s biggest gain was seen after November 11, 2022, when it appreciated around 99 paise in a single day. Mounting concerns about US fiscal health and selling US Dollar from foreign banks provide support to the local currency.
Nonetheless, expectations of lower interest rates by the Reserve Bank of India (RBI) might weigh on the INR. A rise in crude oil prices could contribute to the INR’s downside. 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. Minutes of the Federal Open Market Committee (FOMC) will be the highlight later on Wednesday ahead of the US Consumption Expenditures (PCE) - Price Index report.
Indian Rupee steadies on news of tariff pause
- US President Donald Trump said b on Sunday, that he agreed to an extension on the tariff deadline on the European Union (EU) until July 9, rescinding his threat of a 50% tariff from June 1.
- India has surpassed Japan to become the world’s fourth-largest economy according to IMF data.
- Chicago Federal Reserve (Fed) President Austan Goolsbee noted on Friday that Trump’s latest tariff threats have complicated policy and likely put off changes to interest rates.
- Kansas City Fed President Jeffrey Schmid said that the officials will lean on hard data in making interest rate decisions and the Fed needs to be careful how much emphasis it puts on soft data.
- Markets expect the US Federal Reserve (Fed) will cut twice this year, with the next move not happening until September.
USD/INR holds a bearish tone after facing rejection at the 100-day EMA
The Indian Rupee trades on a flat note on the day after facing rejection from the key 100-day Exponential Moving Average (EMA). The USD/INR pair keeps the bearish vibe on the daily chart, supported by the 14-day Relative Strength Index (RSI), which stands below the midline near 47.00.
The initial support level for USD/INR is seen at the 85.00 psychological level. A break below this floor could set off a drop to 84.84, the low of May 12. A breach of this level could expose the next bearish targets at 84.05, the lower limit of the trend channel.
On the upside, the immediate resistance level to watch is 85.58, the 100-day EMA. Any follow-through buying possibly sends the price back up to 85.80, the upper boundary of the trend channel. Further north, the next hurdle is located at 86.70, the high of April 9.
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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