USD/INR ticks higher ahead of US inflation data
- Indian Rupee opened on a cautious note around 88.25 against the US Dollar ahead of the US inflation data for August.
- Economists expect the US headline CPI to have grown at a faster pace of 2.9% on year.
- The Fed appears certain to cut interest rates next week.
The Indian Rupee (INR) opens slightly lower at around 88.25 against the US Dollar (USD) on Thursday. Investors brace for a sideways trend in the USD/INR pair ahead of the United States (US) Consumer Price Index (CPI) data for August, which will be published at 12:30 GMT.
The impact of the US inflation data will be significant on the size of the interest rate cut, as the resumption of the monetary-easing campaign by the Federal Reserve (Fed) in its monetary policy meeting next week seems certain.
According to the CME FedWatch tool, traders see an 8% chance that the Fed will cut interest rates by 50 basis points (bps) to 3.75%-4.00% on September 17, while the rest point a standard 25-bps interest rate reduction.
Economists expect the US headline CPI to have grown at an annualized pace of 2.9%, faster than 2.7% in July. In the same period, the core CPI – which excludes volatile food and energy items – is estimated to have risen steadily by 3.1%. On a monthly basis, both the headline and the core CPI are expected to have grown by 0.3%.
Earlier, market experts had been arguing that higher consumer inflation expectations in the wake of tariffs imposed by US President Donald Trump could be a drag on speculation of policy rate cuts. But, so far, the impact of Trump’s tariffs has not appeared to be persistent. The Producer Price Index (PPI) report for August, released on Wednesday, showed that prices of goods and services at the producer level surprisingly grew at a moderate pace. Also, a majority of Federal Open Market Committee (FOMC) members, including Chair Jerome Powell, have signaled that the tariff-driven inflation seems to be a one-off, and not stubborn in nature.
Indian Rupee outlook improves on US-India trade deal optimism
- The Indian Rupee demonstrates a sluggish performance against its major peers at open on Thursday. The Indian currency trades cautiously as investors await the CPI data for August, which is scheduled for August.
- The US retail inflation is expected to have grown at an annual pace of 2.1%, faster than 1.55% in July. Still, it would be lower than the Reserve Bank of India’s (RBI) target of 3.7% for the current financial year, which was lowered from 4% in its policy meeting in June. Fears of inflation undershooting the RBI’s target could lead the central bank to loosen its monetary policy further in the remainder of the financial year.
- On the global front, signs of easing trade tensions between the US and India have improved the outlook of the Indian Rupee. On Tuesday, the comments from US President Donald Trump in a post on Truth.Social signaled that trade discussions between both nations are going on, and they will reach a trade agreement soon.
- Improving trade relations between the US and India have also resulted in a slowdown in selling pressure by overseas investors in the Indian stock market. On Wednesday, Foreign Institutional Investors (FIIs) sold shares worth Rs. 115.69 crores, the amount was significantly lower than had been seen in the past few months.
- Earlier, the Indian Rupee was going through a rough phase as the US raised tariffs on India to 50%, the highest among Washington’s trading partners, for buying Oil from Russia. This week, US President Trump has also urged the European Union (EU) to impose 100% tariffs on China and India to pressure Russian leader Vladimir Putin to stop the war in Ukraine. Trump has often called the money coming from India and China to Russia through Oil purchases is funding Moscow's continuing war with Kyiv.
Technical Analysis: USD/INR holds above 20-day EMA
The USD/INR ticks up to near 88.25 against the US Dollar at open on Wednesday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 87.90.
The downside move in the 14-day Relative Strength Index (RSI) has found ground near 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.
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.
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