USD/INR edges up at the start of RBI monetary policy week
- The Indian Rupee falls marginally against the US Dollar ahead of RBI’s monetary policy announcement on Wednesday.
- Investors are mixed about whether the RBI will cut interest rates or hold them steady.
- The US Dollar is under pressure amid risk of US government shutdown.
The Indian Rupee (INR) ticks down at open against the US Dollar (USD) on Monday. The USD/INR edges higher to near 88.90, even as the US Dollar extends its correction, suggesting weakness in the Indian Rupee.
The Indian currency faces selling pressure amid caution ahead of the monetary policy announcement by the Reserve Bank of India (RBI) on Wednesday. Financial market participants are mixed about whether the RBI will cut its Repo Rate further.
Analysts at Citi have stated that the RBI could opt for an insurance cut in the wake of trade tensions between the United States (US) and India over New Delhi buying Oil from Russia or deliver a dovish pause. This year, the RBI has already reduced its Repo Rate by 100 basis points (bps) to 5.5%.
On the contrary, analysts at HDFC Securities have predicted that upbeat Gross Domestic Product (GDP) growth and the overhaul of the Goods and Services Tax (GST) structure to boost consumption, along with strong festive demand, could restrain officials from supporting further interest rate cuts.
Meanwhile, the continuous outflow of foreign funds from the Indian stock market has remained a major drag on the Indian Rupee. On Friday, Foreign Institutional Investors (FIIs) sold equity shares worth Rs. 5,687.58 crores of Indian equity shares. So far in September, FIIs have pared stake worth Rs. 30,141.68 crores.
US Dollar falls further as US government shutdown deadline looms
- The US Dollar corrects further against its peers at the start of the week amid risks of a US government shutdown on Wednesday as the short-term funding bill has yet to be passed by the House or Senate.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.25% lower to near 97.90 at the time of writing. The USD Index started correcting from Thursday after failing to extend an over-a-week long upside move above 98.60.
- Republicans need at least 60 votes for passing the funding bill to avert a government shutdown, and for that they need some Democrats to support the bill despite having a majority in the Senate and the House of Representatives. In response, Democrats have declined to support the bill as they want Republicans to undo cuts in the healthcare budget announced lately.
- This week, investors brace for significant volatility in the US Dollar amid a US-data packed week. Market participants will pay close attention to the US labor market related data to get cues about the current status of the job market. Lately, comments from Federal Open Market Committee (FOMC) members, including Chair Jerome Powell, have signaled that they are more concerned about slowing labor demand and inflation remaining above the central bank’s 2% target.
- On Friday, Fed Vice Chair for Supervision Michelle Bowman argued in favor of reducing interest rates amid growing labor market risks. “We are at serious risk of already being behind the curve in addressing deteriorating labor market conditions,” Bowman said and added, “Should these conditions continue, I [Bowman] am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward,” Reuters reported.
Technical Analysis: USD/INR wobbles near all-time high around 89.10
USD/INR trades sideways from the last three trading days after posting a fresh all-time high around 89.12 last week. The upward-sloping 20-day Exponential Moving Average (EMA) near 88.42 signals more upside in the pair.
The 14-day Relative Strength Index (RSI) stays above 60.00, 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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