USD/INR rises further Indian Rupee weakens on rising oil price
- The Indian Rupee slides further against the US Dollar, with the USD/INR rising to near 88.60.
- Rising oil prices due to heavy sanctions on Russia have weighed on the Indian Rupee.
- The Fed is almost certain to cut interest rates on Wednesday.
The Indian Rupee (INR) extends its downside against the US Dollar (USD) at open on Tuesday. The USD/INR jumps to near 88.60 as the Indian Rupee underperforms due to a recovery move in the Oil price seen in the past week.
On the New York Mercantile Exchange (NYMEX), West Texas Intermediate (WTI) Crude Oil holds onto weekly gains around $61.50. The crude oil price has rallied lately as the European Union (EU) approved its 19th sanctions package against Russia, and the United States (US) imposed Ukraine-related sanctions on Russia’s two largest publicly traded oil firms, Reuters reported.
Currencies from economies, such as India, that rely heavily on imports of crude oil to address their energy needs, face significant pressure due to higher oil prices.
Additionally, subdued trading activity by overseas investors in the Indian stock market over the past few weeks has also weighed on the Indian currency. The average amount of sales/purchases carried by Foreign Institutional Investors (FIIs) in Indian equity markets has been relatively lower than what has been seen in the past few months.
Going forward, the major trigger for the Indian Rupee will be developments in trade talks between the US and India. Over the weekend, a Bloomberg report showed that negotiators from both nations have agreed on almost all issues, and a deal could be announced soon. The Indian Rupee has been through a rough phase due to trade frictions between the US and China, which followed after Washington increased tariffs on imports from New Delhi to 50% for buying oil from Russia.
Meanwhile, a report from Reuters has shown that the Reserve Bank of India (RBI) has likely sold US Dollars to shore up the Indian Rupee. The RBI has been seen intervening in currency markets a number of times in the past few months to support the Indian Rupee.
Daily digest market movers: The Fed is expected to cut interest rates on Wednesday
- The USD/INR gains further on Tuesday, even as the US Dollar revisits the weekly low due to firm expectations that the Federal Reserve (Fed) will cut interest rates in the monetary policy announcement on Wednesday.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.15% lower to near 98.60.
- Traders are increasingly confident that the Fed will cut interest rates by 25 basis points (bps) to 3.75%-4.00% on Wednesday due to labor market risks and moderate inflation growth. Lately, the majority of Federal Open Market Committee (FOMC) members, including Chairman Jerome Powell, have warned of deteriorating job conditions.
- Meanwhile, the US Consumer Price Index (CPI) report for September showed on Friday that monthly headline and core inflation rose at a moderate pace of 0.3% and 0.2%, respectively. So far, the impact of US tariffs has not appeared to be persistent on prices.
- In the policy meeting, investors will also focus on commentary about the further monetary policy outlook. According to the CME FedWatch tool, traders are confident that the Fed will also cut interest rates in the December policy meeting.
- On the global front, improving hopes of a trade deal between the US and China have boosted the demand for risk-sensitive assets. US President Donald Trump stated on Monday that both nations will reach a deal after his meeting with Chinese leader Xi Jinping later this week in South Korea.
- “I've got a lot of respect for President Xi and I think we're going to come away with a deal,” Trump said, and added, “I'll be going to China in the earlier part of next year,” Reuters reported.
Technical Analysis: USD/INR aims to return above 20-day EMA
The USD/INR pair jumps to near 88.60 at open on Tuesday. The pair strives to return above the 20-day Exponential Moving Average (EMA), which trades around 88.41.
The 14-day Relative Strength Index (RSI) recovers sharply from 40.00, suggesting buying interest at lower levels.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the all-time high of 89.12 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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