USD/INR edges lower ahead of US inflation data
- The Indian Rupee trades marginally higher at the open against the US Dollar.
- The USD Index trades firmly near the three-week high ahead of the US CPI data for June.
- Soft Indian inflation data for June boosts hopes of more cuts in RBI’s Repo Rate.
The Indian Rupee (INR) ticks up at open against the US Dollar (USD) on Tuesday. The USD/INR pair edges lower to near 86.00 even as the US Dollar (USD) demonstrates strength ahead of the United States (US) Consumer Price Index (CPI) data for June, which will be published at 12:30 GMT.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near the three-week high around 98.00.
Investors will closely monitor the CPI data as it will demonstrate the impact of sectoral tariffs on inflation. So far, US President Donald Trump has imposed 25% tariffs on imports of automobiles and auto components, and 50% on steel and aluminum. He has also announced a 50% additional import duty on copper, which will become effective from August 1.
As measured by the CPI, the US headline inflation is expected to have grown by 2.7% on year, faster than 2.4% in May. In the same period, the core CPI – which excludes volatile food and energy prices – rose at a faster pace of 3%, compared to the prior release of 2.8%. On month, both headline and the core CPI are estimated to have risen 0.3%, faster than the former reading of 0.1%.
Signs of accelerating price pressures would discourage Federal Reserve (Fed) officials from arguing in favor of reducing interest rates in the near term. This would be in contrast with US President Trump’s ambitions, who has criticized the Fed, especially Chairman Jerome Powell, for not bringing interest rates down.
On Monday, US President Trump criticized Fed Powell again for maintaining a restrictive monetary policy stance, stating that the interest rates should be reduced to 1% or below. We have a bad Fed chairman, really bad," Trump said at the White House and added, "We should be at 1%. We should be less than 1%," Fox Business reported.
Daily digest market movers: Indian Rupee ticks up despite cooling inflationary pressures
- The Indian Rupee as soft Consumer Price Index (CPI) data for June on year have prompted hopes of further monetary policy easing by the Reserve Bank of India (RBI) this year.
- India’s Ministry of Statistics and Programme Implementation reported on Monday that the headline inflation grew moderately by 2.1%, compared to estimates of 2.5% and 2.82% recorded in May. This was the lowest figure seen in over six years.
- According to the CPI report, a sharp decline in food inflation due to widespread monsoon contributed significantly to cooling price pressures. Meanwhile, the Wholesale Price Index (WPI) Inflation, which indicates change in price pressure at the producer level, fell into the negative territory. This also increased confidence in price pressures cooling down, paving the way for more interest rate cuts by the RBI this year.
- In the June meeting, the RBI front-loaded interest rate cuts by lowering the Repo Rate surprisingly by 50 basis points (bps) to 5.5% and reducing the Cash Reserve Ratio (CRR) by 100 bps to 3%.
- Meanwhile, uncertainty surrounding the trade agreement between the US and India is expected to keep the Indian Rupee on the back foot. A report from Bloomberg released over the weekend stating that Washington will not send the letter to India, specifying reciprocal tariff rates, which he has dispatched to 22 nations yet, notably Japan, Canada, Mexico, South Korea and the European Union (EU) increased investors’ confidence that both nations could sign a trade pact before the August 1 deadline.
- During the day, investors will focus on the Trade Deficit Government data for June. In May, the trade deficit was seen at $21.88 billion.
Technical Analysis: USD/INR holds above 20-day EMA
USD/INR falls slightly to near 86.00 in the opening session on Tuesday. The pair struggles to extend its upside above the fresh three-week high of 86.16 posted on Monday. However, the near-term trend of the pair remains bullish as it stays above the 20-day Exponential Moving Average (EMA), which trades around 85.93.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting that the asset lacks momentum on either side.
Looking down, the May 27 low of 85.10 will act as key support for the major. On the upside, the June 24 low at 86.42 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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