The Indian Rupee (INR) faces some selling pressure on Thursday as terrorist attacks in Kashmir, India, weighed on sentiment. Furthermore, rising crude oil prices undermine the Indian currency, as India is the world's third-largest oil consumer.
However, the weaker US Dollar might help limit the INR’s losses. Investors will keep an eye on the US weekly Initial Jobless Claims due later on Thursday. Also, the Chicago Fed National Activity Index, Durable Goods Orders, and Existing Home Sales are due later on Thursday.
The Indian Rupee weakens on the day. However, in the longer term, the bearish outlook of the USD/INR pair remains intact as the price is below the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The downward momentum is reinforced by the 14-day Relative Strength Index (RSI), which stands below the midline near 44.35.
The initial support level for USD/INR is located at 84.85, the lower limit of the descending trend channel. Extended losses could expose 84.22, the low of November 25, 2024. The next downside target is seen at 84.08, the low of November 6, 2024.
In the bullish case, the immediate resistance level for the pair emerges at 85.85, the 100-day EMA. Further north, the next hurdle to watch is 86.45, the upper boundary of the trend channel.
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.