USD/INR falls at open as de-escalating Israel-Iran conflict improves market sentiment
- The Indian Rupee trades higher, nearing 85.95 against the US Dollar in the opening session, amid easing Middle East tensions.
- Investors expect the Fed to leave interest rates steady on Wednesday.
- The RBI opens the door for further monetary policy expansion.
The Indian Rupee (INR) rises to near 85.95 at the open against the US Dollar (USD) on Tuesday. The USD/INR pair faces selling pressure as fresh signs of de-escalation in tensions between Israel and Iran have slightly increased the risk appetite of investors, a scenario that lifts demand for riskier currencies, such as the Indian Rupee.
After the G7 meeting, US President Donald Trump has asked Vice President JD Vance and the Middle East envoy to offer to meet with the Iranians this week, The New York Times reported.
This development came after a report from Reuters showed that Tehran asked its Middle East peers to urge US President Trump to use his influence on Israeli Prime Minister Benjamin Netanyahu to push for an immediate ceasefire.
A truce between Israel and Iran will provide dual benefits of a cheerful market mood and lower Oil prices to the Indian Rupee. The Indian currency was battered badly on Friday as the Oil price rallied after Israel launched a series of attacks on military bases and nuclear facilities in Iran, aiming to stop them from building nuclear warheads. Given that India is one of the largest oil-importing nations in the world, higher Oil prices weigh on the Indian Rupee.
Daily digest market movers: Indian Rupee gains against US Dollar, Fed policy in focus
- The Indian Rupee attracts bids at open against the US Dollar as the latter trades cautiously, with investors focusing on the Federal Reserve’s (Fed) monetary policy announcement on Wednesday. During Asian hours, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat around 98.15.
- According to the CME FedWatch tool, the Fed is almost certain to leave interest rates steady in the range of 4.25%-4.50%.
- Investors will closely monitor the comments from Fed Chair Jerome Powell at the press conference, following the interest rate decision, to get cues about when the central bank will start reducing its key borrowing rates. The major highlight of the Fed policy would be the Fed’s dot plot, which shows where officials see interest rates heading in the near and long term.
- In today’s session, investors will focus on the US Retail Sales data for May, which will be published at 12:30 GMT. The Retail Sales data, a key measure of consumer spending, is expected to have declined by 0.7% after a 0.1% growth seen in April.
- In the Asian region, Reserve Bank of India (RBI) Governor Sanjay Malhotra has expressed confidence that cooling inflationary pressures have opened space for further monetary policy expansion. “As regards any future easing, while it will not be right on my part to pre-empt the MPC, if the inflation outlook turns out to be below our projections, it will open up policy space,” Malhotra said in an interview with Business Standard on Monday.
- Slightly dovish comments from RBI's Malhotra came after year-on-year Consumer Price Index (CPI) and Wholesale Price Index (WPI) data for May grew at a moderate pace. The CPI and WPI data rose by 2.82% and 0.39%, respectively. In the monetary policy announcement earlier this month, the RBI projected the headline inflation target for the current financial year at 3.7%.
Technical Analysis: USD/INR retraces to near 85.95
The USD/INR pair corrects to near 85.95 on Tuesday after posting a fresh two-month high near 86.25 the previous day. However, the near-term trend of the pair remains firm as it holds the 20-day Exponential Moving Average (EMA), which trades around 85.77.
The 14-day Relative Strength Index (RSI) struggles to break above 60.00. A fresh bullish momentum would emerge if the RBI breaks above that level.
Looking down, the 20-day EMA is a key support level for the major. On the upside, the May 23 high of 86.44 will be a critical hurdle for the pair.
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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