USD/INR declines at open amid US-China trade frictions
- The Indian Rupee gains to near 87.80 against the US Dollar amid ongoing trade tensions between the US and China.
- India confirms ongoing discussions over deepening energy cooperation with the US.
- Fed’s Waller sees the neutral rate as 1%-1.25% lower than the current Federal Fund Rate.
The Indian Rupee (INR) opens higher against the US Dollar (USD) on Friday. The USD/INR pair slides to near 87.80 as the US Dollar faces a sharp selling pressure due to ongoing United States (US)-China trade frictions and firm expectations that the Federal Reserve (Fed) will cut interest rates two more times this year.
On Friday, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its losing streak for the fourth trading day, trading 0.2% lower to near 98.15 during the Asian session.
Trade tensions between the US and China stemmed after the White House announced additional 100% tariffs on imports from Beijing in response to its rising export controls on rare earths and magnets. The impact of China’s measures towards restricting exports of rare earth minerals is seen across the globe, as leaders from other nations are also criticizing Beijing’s increasing control.
On Thursday, United Kingdom (UK) Chancellor of the Exchequer Rachel Reeves also denounced China’s decision on rate earths. “China’s decision on rare earths is wrong, dangerous for the world economy, and I welcome a greater G7 focus on where we get critical minerals from,” Reeves said.
Meanwhile, China’s Commerce Ministry has stated that Washington’s interpretation of Beijing’s rare earth export control measures is seriously “distorted and exaggerated”, Reuters reported. The ministry clarified that the demand for an export license is merely a regulatory measure, and not a ban on export of critical minerals.
Daily digest market movers: Indian Rupee gains on hopes of US-India trade deal
- The Indian Rupee has broadly strengthened against its peers amid growing expectations that the US and India could reach a trade deal soon, and cooling selling pressure by overseas investors in the Indian stock market.
- The speculation over the US-India reaching a consensus soon bolstered after President Donald Trump announced that India is ready to halt their oil purchases from Russia. Trade tensions between the US and India stemmed after Washington imposed an additional 25% tariff as a penalty on imports from New Delhi for buying oil from Russia, citing that funds flowing into Moscow are helping it to continue the war against Ukraine.
- In response, India’s Ministry of External Affairs (MEA) has diplomatically answered that New Delhi’s priority is to safeguard the interests of the Indian consumer in a volatile energy scenario and confirmed that the current US administration has shown interest in deepening energy cooperation with us, NDTV reported.
- Signs of improving US-India trade tensions are favorable for the Indian Rupee. Meanwhile, Foreign Institutional Investors (FIIs) turned out to be buyers on Thursday in Indian equity markets, and bought shares worth Rs. 997.29 crores.
- In the US, growing expectations for more interest rate cuts by the Fed have been a major drag on the US Dollar. According to the CME FedWatch tool, traders have fully priced in a 50-basis-point (bps) reduction in interest rates in the remaining year and see a 19.6% chance that the Fed could cut borrowing rates by 75 bps.
- On Thursday, Fed Governor Christopher Waller stated that labor market weakness supports the need to move the central bank towards a neutral rate, which is 100-125 bps lower than the current Fed Funds Rate.
Technical Analysis: USD/INR trades below 20-day EMA
The USD/INR pair slumps to near 87.80 at open on Friday. The near-term trend of the pair has turned bearish as it has stabilized below the 20-day Exponential Moving Average (EMA), which is around 88.54.
The 14-day Relative Strength Index (RSI) falls below 40.00. A fresh bearish momentum if the RSI holds below that level.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the 20-day EMA will be a key barrier.
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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