USD/INR falls while investors await US-India trade deal confirmation
- The Indian Rupee trades higher against the US Dollar amid trade talks between the US and India in Washington.
- US President Trump stated that a deal with India will increase Washington’s access to Indian markets.
- Fed officials warned that tariff-driven inflation has just started.
The Indian Rupee (INR) opens higher against the US Dollar (USD) on Thursday. The USD/INR ticks down to near 85.95 but is broadly sideways, while investors await the confirmation of a trade deal between the United States and India. US President Donald Trump has reiterated several times that Washington is close to reaching a deal with New Delhi, however, no confirmed announcement has kept investors on the sidelines.
On Wednesday, US President Trump expressed confidence in an interview aired on Real America’s Voice that he will sign a deal with India soon, while stating the possibility of a deal with the European Union (EU) too. "We’re [Washington] very close to India, and we could possibly make a deal with the EU,” Trump said, Reuters reported.
Trump's comments came at a time when India’s Chief Trade Negotiator Rajesh Agrawal-led team has reached Washington for the next round of trade talks. Earlier this week, Union Minister Piyush Goyal affirmed that both nations are working to reach a “win-win” agreement, Financial Express (FE) reported.
Apart from the confirmation of a trade pact between India and the US, investors are also keen to know trade terms. Market experts believe that the removal of trade barriers by New Delhi for making a deal with Washington could expose Indian companies to capital-heavy corporations of the US. Such a scenario would lead to an intense competition for domestic companies that could weaken overall business sentiment.
Earlier this week, US President Trump also stated that a trade pact with India will allow US access to Indian markets.
Daily digest market movers: Indian Rupee gains against US Dollar
- The Indian Rupee gains against the US Dollar even as the latter trades higher, following comments from Federal Reserve (Fed) officials that the impact of tariffs announced by Washington has just started to build.
- “It's early days for impact of tariffs on economy, which is modest so far but will increase over time,” New York Fed Bank President John Williams said in a speech at New York Association for Business Economics on Wednesday. Williams warned that Tariffs should boost inflation by “one percentage point rest of 2025 into 2026”.
- On the current monetary policy stance, Williams said that it is at the right, which is likely to lower inflation and modestly weaken the job market.
- Separately, Atlanta Fed President Raphael Bostic also warned while being interviewed by Fox Business that the headline inflation is “moving away from our target not towards it” due to an increase in prices of products from import-heavy sectors. We are seeing things underlying in the economy that suggest inflation pressures are up, and that’s really a source of concern, Bostic added.
- Fears of a resumption in inflationary pressures on the upside were prompted after the US Consumer Price Index (CPI) report for June showed that prices of products that are imported into the US, such as household furnishings, recreation, and apparel rose sharply.
- Meanwhile, US President Trump continues to criticize the Fed, especially Chairman Jerome Powell for not bringing interest rates down. On Wednesday, a report from Bloomberg showed that Trump will likely fire Powell soon. However, Trump denied those reports.
Technical Analysis: USD/INR struggles around 20-day EMA
USD/INR falls to near 85.90 at open on Thursday. The pair struggles to hold the 20-day Exponential Moving Average (EMA), which trades around 85.93, suggesting that the near-term trend is uncertain.
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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