USD/INR edges lower as India revises GST slabs to boost economy
- The Indian Rupee gains against the US Dollar at open as the Indian administration reveals a new GST framework.
- India revises GST tax slabs from four to two.
- Investors await the US ADP Employment and ISM Services PMI data.
The Indian Rupee (INR) ticks up against the US Dollar (USD) at open on Thursday. The USD/INR pair edges lower to near 88.15 as the Indian government has revised Goods and Services Tax (GST) rates lower to boost consumption.
In late Indian Standard Time (IST) hours on Wednesday, India’s Finance Minister Nirmala Sitharaman confirmed, after the 56th GST council meeting, that the government will bring down the four-tier tax framework to two, in which there will be only 5% and 18% slabs, and 12% and 28% tax brackets will be abolished. The administration has introduced a 40% tax slab for luxury items to offset the loss of revenues from the new two-tier framework.
India’s FM Sitharaman also announced that the new GST framework will become effective from September 22, which aims to provide financial support to common man and middle-class families of the country.
Lower taxes on discretionary and non-discretionary items would leave more money in the hands of the public, a move that would boost consumption and investment in the economy. Such a scenario could prove to be inflationary for the economy, a move that might restrict the Reserve Bank of India (RBI) from reducing interest rates again in the remainder of the year.
Meanwhile, the consistent outflow of foreign funds from Indian stock markets continues to be a major drag on the Indian Rupee. Foreign Institutional Investors (FIIs) have remained net sellers in all three trading days of September. However, the pace of selling appears to be moderate than what was seen in July and August. On Wednesday, FIIs pared stake worth Rs. 1,666.46 crores from the Indian equity markets.
Daily digest market movers: US Dollar faces selling pressure after weak US Job Openings data
- A slight downside move in the USD/INR pair is also driven by some correction in the US Dollar on the back of weak United States (US) JOLTS Job Openings data for July published on Wednesday. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades calmly close to Wednesday’s low around 98.00.
- The Bureau of Labor Statistics (BLS) showed that US employers posted 7.18 million fresh jobs, lower than expectations of 7.4 million and the prior reading of 7.36 million. Lower job postings signify a soft labor market, a scenario that allows traders to raise bets supporting interest rate cuts by the Federal Reserve (Fed).
- According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September policy meeting has increased to 97.6% from 92% seen before the JOLTS Job Openings data release.
- This week, the major trigger for the US Dollar will be the Nonfarm Payrolls (NFP) data for August, which will be released on Friday. Investors will pay close attention to the official employment data as it intensified Fed dovish bets after the release of July’s report, which showed a significant downward revision in May and June’s payrolls data.
- In Thursday’s session, investors will closely monitor the ADP Employment Change and ISM Services Purchasing Managers’ Index (PMI) data for August. The ADP is expected to show that the US private sector hired 65K new workers, significantly lower than 104K in July. Meanwhile, the ISM Services PMI is seen at 51.0, higher than the prior release of 50.1.
Technical Analysis: USD/INR pair holds above 20-day EMA
The USD/INR pair ticks down at open, but is broadly sideways, above 88.00 on Thursday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 87.73.
The 14-day Relative Strength Index (RSI) trades calmly above 60.00, suggesting that a fresh bullish momentum has come into effect.
Looking down, the 20-day will act as key support for the major. On the upside, the round figure of 89.00 would be the key 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.
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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