USD/INR snaps four-day losing streak after Fed’s monetary policy outcome
- The Indian Rupee opens lower against the US Dollar after a four-day winning streak.
- The Fed reduced interest rates by 25 bps to 4.00%-4.25% and signaled two more this year.
- FIIs continue to sell equities in the Indian stock market.
The Indian Rupee (INR) fails to extend the four-day winning streak against the US Dollar (USD) on Thursday. The USD/INR recovers to near 88.00 as the US Dollar (USD) gains ground in the aftermath of the monetary policy announcement by the Federal Reserve (Fed) on Wednesday.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto Wednesday’s recovery move around 97.00. The DXY bounced back on Wednesday after posting a fresh three-year low near 96.20.
In the monetary policy announcement, the Fed started the monetary-easing campaign with a usual 25 basis points (bps) reduction that pushed interest rates lower to 4.00%-4.25%, citing a slowdown in the United States (US) job market. The Fed’s dot plot signaled that there will be two more interest rate cuts this year and one each in 2026 and 2027.
Theoretically, lower interest rates by the Fed and signals of further monetary policy easing lead to weakness in the US Dollar. However, the Greenback got some relief as it was already facing the wrath of likely monetary adjustments from the past few weeks.
Another reason behind some recovery in the US Dollar appears to be hints from the United States (US) central bank that there is no need for an aggressive adjustment in the policy stance at the current juncture.
“Could think of today's cut as a risk management cut,” Fed Chair Jerome Powell said at the press conference, and added, “Don't feel the need to move quickly on rates.”
Daily digest market movers: Indian Rupee retraces after four-day rally
- The Indian Rupee corrects against its peers on Thursday after a strong performance in the last four trading days. The Indian currency traded firmly on optimism that the US and India will reach a trade agreement soon.
- Trade relations between the US and India were going through a rough phase as President Donald Trump raised tariffs on imports from New Delhi to 50% for buying Oil from Russia.
- However, trade tensions between the US and India tempered on Tuesday after President Donald Trump acknowledged Prime Minister Narendra Modi’s efforts aimed at stopping the Russia-Ukraine war. These comments from Trump came after a long meeting between top negotiators from the US and India. Both nations stated that the meeting remained positive and they will continue trade discussions virtually.
- Meanwhile, overseas investors continue to dump their holdings in the Indian stock market despite signs of improving trade relations between the US and India.
- On Wednesday, Foreign Institutional Investors (FIIs) pared stake worth Rs. 1,124.54 crores in the cash segment of the Indian equity market. So far in September, FIIs have sold equity shares worth Rs. 11,329.08 crores.
- Going forward, the next major trigger for the Indian Rupee will be the imposition of new Goods and Services Tax (GST) rates from September 22. In early September, the Indian government announced a new GST structure, according to which there will be only two tax slabs instead of four. New GST reforms aim to stimulate domestic growth by boosting households’ spending.
Technical Analysis: USD/INR attracts bids near 20-day EMA
USD/INR bounces back to near 88.15 on Thursday after posting a fresh two-week low near 87.80 the previous day. The pair rebounds after correcting slightly below the 20-day Exponential Moving Average (EMA), which is around 88.00.
The 14-day Relative Strength Index (RSI) declines to near 50.00, indicating that the bullish momentum has run its course for now. However, the bullish bias remains intact.
Looking down, the August 28 low of 87.66 will act as key support for the major. On the upside, the September 11 high of 88.65 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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