USD/INR extends winning streak on possibility of US attack on Iran
- The Indian Rupee edges higher to near 86.57 against the US Dollar on escalating Middle East tensions.
- Bloomberg reported the possibility of the US striking Iran in the coming days.
- The Fed sees fewer interest rate cuts in 2026 and 2027 and retains two rate cuts for the year.
The Indian Rupee (INR) ticks up against the US Dollar (USD) on Thursday to near the two-month high around 86.57, posted the previous day. The USD/INR pair trades firmly amid widening conflict between Iran and Israel, and the shallow interest rate cut path guided by the Federal Reserve (Fed) on Wednesday after leaving interest rates steady in the current range of 4.25%-4.50% for the fourth time in a row.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, refreshes weekly high near 99.10.
The war between Tel Aviv and Tehran, which has entered its seventh day on Thursday, has escalated further amid the possibility that the United States (USD) could also strike Iran as early as this weekend, Bloomberg reported.
Financial market participants warn that the direct involvement of the US in the Middle East conflict could mark a significant escalation, which could lead to some devastating outcomes across the globe.
Earlier this week, the US also mobilized some defence equipment to the Middle East, aiming to protect its military bases located in the region. "We are postured defensively in the region to be strong, in pursuit of a peace deal," Defense Secretary Pete Hegseth said in an interview with Fox News.
Heightened geopolitical tensions increase demand for safe-haven assets, such as the US Dollar.
Daily digest market movers: Indian Rupee weakens amid risk-off mood, firm Oil prices
- The Indian Rupee seems vulnerable against its major peers on Thursday amid dismal market sentiment and firm Oil prices. Tensions between Israel and Iran have dampened demand for riskier assets and have pushed Oil prices higher.
- Currencies associated with nations having higher dependency on the import of Oil, such as India, become vulnerable to wild swings in Oil price movements.
- Another reason behind weakness in the Indian currency is growing expectations that the Reserve Bank of India (RBI) could reduce interest rates again this year. Market participants have become increasingly confident of further policy-easing after the release of the headline Consumer Price Index (CPI) and Wholesale Price Index (WPI) inflation data for May, which showed that price pressures grew moderately.
- Earlier this week, RBI Governor Sanjay Malhotra also expressed confidence in an interview with Business Standard that, “if the inflation outlook turns out to be below our projections, it will open up policy space”.
- In the US region, the Fed left interest rates unchanged in the range of 4.25%-4.50% for the fourth consecutive time, as expected, and retained their forecast of two interest rate cuts, but revised interest rate guidance higher for 2026 and 2027 amid upside risks to inflation.
- Fed Chair Jerome Powell cheered soft inflation readings seen in last few months but warned that he is “beginning to see some tariff effects and expect more in coming months”, during the press conference following the interest rate decision on Wednesday.
- Jerome Powell warned of stagflation risks, citing that “near-term inflation expectations have moved up,” and business sentiment has soured due to concerns over tariffs imposed by US President Donald Trump. Powell added that “effects of tariffs will depend on level, and increases this year will likely weigh on economic activity and push up inflation”. Meanwhile, Fed officials have also revised Gross Domestic Product (GDP) growth for the year to 1.4%, down from a prior estimate of 1.7%.
Technical Analysis: USD/INR stays above 20-day EMA
The Indian Rupee extends its losing spree against the US Dollar for the third trading day on Thursday. The near-term trend of the USD/INR pair is bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 85.95.
The 14-day Relative Strength Index (RSI) breaks above 60.00, suggesting that a fresh bullish momentum has been triggered.
Looking down, the 20-day EMA is a key support level for the major. On the upside, the April 11 high of 87.14 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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