USD/INR strengthens as FIIs outflow, US H-1B visa fees hike weigh on Indian Rupee
- The Indian Rupee slides further to near 89.10 against the US Dollar as the former weakens due to multiple headwinds.
- An increase in H-1B visa fees and US-India trade tensions have battered the Indian Rupee.
- Fed’s Powell signals caution on further interest rate cuts amid upside inflation risks.
The Indian Rupee (INR) refreshes its all-time low around 89.10 against the US Dollar (USD) at open on Wednesday. The USD/INR pair trades in uncharted territory as an absence of a breakthrough in trade discussions between India and the United States (US) over the bilateral trade agreement and the announcement of a hike in H-1B visa fees by Washington have hit the Indian Rupee badly.
On Monday, India’s Commerce Minister Piyush Goyal visited the US to extend trade talks with Washington, which happened in New Delhi in the third week of this month, and were described as “positive and forward-looking” by both nations.
A report from NDTV Profit has stated that trade discussions between India’s Commerce Minister Goyal and top negotiators from Washington went “well” and further meetings could be potentially expected while Goyal is in the US.
The delay in the US and India reaching a trade agreement has dampened sentiment of overseas investors towards the Indian stock market, even as the government has unveiled Goods and Services (GST) reforms to boost consumption.
On Tuesday, Foreign Institutional Investors (FIIs) sold shares worth Rs. 3551.19 crores in the Indian equity market. So far in September, FIIs have pared stake worth Rs. 17,032.93 crores.
Over the weekend, Washington announced a hike in H-1B visa fees to $100K to increase employment opportunities for Americans. This scenario is unfavorable for Indian IT companies that do a significant amount of business with US tech firms, a move that could hit the operating margins of the Indian IT sector dramatically.
US Dollar trades calmly as Fed signals caution on further interest rate cuts
- A significant weakness in the Indian Rupee has contributed to a sharp upside in the USD/INR pair. Meanwhile, the US Dollar trades calmly as Federal Reserve (Fed) Chair Jerome Powell has expressed caution on further monetary policy easing, citing that the current economic situation is challenging amid high inflation and a weakening labor market.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades slightly higher around 97.35.
- "Near-term risks to inflation are tilted to the upside and risks to employment to the downside - a challenging situation,’’ Fed’s Powell said at the Greater Providence Chamber of Commerce on Tuesday, Reuters reported. He added that the current interest rate range leaves us “well positioned to respond to potential economic developments”. Powell refrained from guiding the monetary policy outlook, stating that our policy is “not” on a preset course.
- On Monday, a slew of Federal Open Market Committee (FOMC) members, except newly appointed Governor Stephen Miran, argued in favor of maintaining caution on further interest rate cuts as inflation has remained well above the central bank’s target of 2%. While Miran stated that interest rates are roughly two percentage points higher than what is needed to bring inflation down.
- Separately, Fed Governor Michelle Bowman argued in favor of reducing interest rates quickly on Tuesday to support the slowing job market. "It’s a lot easier to support the labor market by lowering the federal funds rate than it is to fix it after it’s broken," Bowman said and added, "If demand conditions do not improve, businesses may need to begin to lay off workers.”
- On the economic front, preliminary US S&P Global PMI data for September have come in weaker than projected. The Composite PMI came in lower at 53.6 than the estimates and the prior reading of 54.6. The overall business activity growth cooled down as manufacturing and the services PMI expanded moderately.
- Going forward, investors will focus on the US Durable Goods Orders and Personal Consumption Expenditure Price Index (PCE) data for August, which will be released on Thursday and Friday, respectively.
Technical Analysis: USD/INR breaks above 89.00
USD/INR tests region above 89.00 for the first time in history. The upward-sloping 20-day Exponential Moving Average (EMA) near 88.25 signals more upside in the pair.
The 14-day Relative Strength Index (RSI) stays above 65.00, suggesting a strong bullish momentum.
Looking down, the 20-day EMA will act as key support for the major. On the upside, the round figure of 90.00 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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