USD/INR gains as US-India trade tensions diminish Indian economy outlook
- The Indian Rupee falls against the US Dollar at open amid US-India trade tensions.
- India’s PM, Narendra Modi, is scheduled to visit China to attend the SCO summit.
- Fed's Waller could be Chairman Powell’s successor, according to Bloomberg.
The Indian Rupee (INR) opens lower against the US Dollar (USD) on Friday after a three-day winning streak. The USD/INR recovers to near 87.75 as the market experts have warned that trade tensions between the United States (US) and India could hit Indian exports significantly.
Trade tensions between both economies escalated on Wednesday after US President Donald Trump increased tariffs on imports from India to 50%, as the latter maintains its stance that it will continue to buy Oil from Russia, a scenario that diminishes the competitiveness of New Delhi’s textile, pharmaceuticals, and gems and jewellery industry.
Analysts at Bank of America (BofA) have warned that widening tariff differential between India and other Asia-Pacific nations may lead to a material slippage in New Delhi’s Gross Domestic Product (GDP). They further added that Trump’s tariffs would imply a “net impact of $10 billion to India’s outgoing shipments to the US”.
However, the Reserve Bank of India (RBI) held real Gross Domestic Product (GDP) growth projections unchanged at 6.5% for the current financial year, despite being aware of ongoing US-India trade issues.
Meanwhile, the consistent outflow of foreign funds from Indian equity markets has also capped the Indian Rupee’s upside. So far this month, Foreign Institutional Investors (FIIs) have sold Rs. 15,951.68 crores worth of Indian equities. They have pared stake from the Indian stock market on each trading day of August. In July, FIIs sold Rs. 47,666.68 crores worth of stocks.
Going forward, investors await India’s Prime Minister Narendra Modi’s visit to China to attend the Shanghai Cooperation Organisation (SCO) summit. Market experts believe that there could be a chance for both to conduct bilateral talks, given that Washington has also threatened to impose the penalty of buying Russian Oil on China too.
Daily digest market movers: India Rupee weakens against the US Dollar
- The Indian Rupee resumes its downside journey against the US Dollar even as the latter struggles to gain ground, following dovish guidance on the interest rate outlook by Federal Reserve (Fed) officials.
- On Wednesday, Minneapolis Fed President Neel Kashkari, San Francisco Fed President Mary Daly, and Fed Governor Lisa Cook argued in favor of reducing interest rates, citing downside risks to the labor market.
- Meanwhile, Atlanta Fed President Raphael Bostic has also warned of slowing job creation, but refrained from committing to the resumption of the monetary expansion cycle, citing that price pressures are expected to accelerate in the coming months. “The way tariffs are unfolding makes it hard to pin down the impact and suggests the episode will last much longer than people anticipated,” Bostic said.
- Going forward, the selection of Chairman Jerome Powell’s successor and the appointment of Fed Governor Adriana Kugler’s replacement to fill her tenure will be key triggers for the US Dollar.
- A report from Bloomberg has shown that Fed Governor Christopher Waller emerges as a key contender to become the next Chairman of the US central bank. The report also stated that Waller has met with Trump’s team members, who are impressed with him.
- Earlier this week, US President Trump stated that he will select Fed Kugler’s replacement by the end of the week. Market participants believe that the entry of Trump’s candidate into the Federal Open Market Committee (FOMC) will increase hopes of interest rate cuts by the Fed in the near term. Trump has criticized the Fed, especially Jerome Powell, a number of times for maintaining a restrictive monetary policy stance.
Technical Analysis: USD/INR snaps three-day losing streak
The USD/INR resumes its upside journey after a three-day sell-off and rebounds to near 87.75. The pair started correcting after revisiting an all-time high around 88.25 on Tuesday. However, the near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 87.08.
The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting a strong bullish momentum
Looking down, the 20-day EMA will act as key support for the major. On the upside, Tuesday’s high of around 88.25 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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