USD/INR moves higher due to US-China trade optimism, receding Fed dovish bets
- The Indian Rupee weakens against the US Dollar, with the USD/INR rising to near 88.85.
- Receding Fed dovish speculation and improving US-China trade relations have strengthened the US Dollar.
- FIIs sold shares worth Rs. 5,617.75 crores in the last two trading days.
The Indian Rupee (INR) trades lower against the US Dollar (USD) after a flat opening on Friday. The USD/INR pair rises to near 88.85 as the US Dollar (USD) trades broadly firm due to receding Federal Reserve (Fed) dovish bets, and improving trade relations between the United States (US) and China.
At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near an almost three-month high around 99.70 posted on Thursday.
The CME FedWatch tool showed that the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has eased to 72.8% from 91.1% seen a week ago. Fed dovish bets have cooled down after the monetary policy announcement on Wednesday, in which Chairman Jerome Powell argued against reducing interest rates in the December meeting after reducing them by 25 bps to 3.75%-4.00%. “Another cut in December is far from assured,” Powell said in the press conference.
For more cues on the interest rate outlook, investors await speeches from Federal Open Market Committee (FOMC) members: Atlanta President Raphael Bostic and Cleveland President Beth Hammack, scheduled during the North American session. Investors would also like to know the current status of the labor market amid the absence of economic data releases due to the ongoing federal shutdown.
Daily digest market movers: Indian Rupee weakens on renewed FIIs exit
- Signs of improving trade relations between the US and China are also providing support to the USD/INR pair. On Thursday, US President Donald Trump stated that the “meeting with Chinese leader Xi Jinping was amazing”. Trump added, “On a scale of 1 to 10, the meeting with Xi was a 12”.
- Trump further added that tariffs on China will be 47%, down from 57% as Beijing is ready to cooperate on fentanyl issues, there will be no roadblocks on rare earth exports to Washington, and Beijing will begin purchasing soybeans soon.
- In response, the Chinese Commerce Ministry has stated that Beijing will suspend export control measures announced on October 9 for a year and will expand agricultural trade with Washington.
- Later on Thursday, US Treasury Secretary Scott Bessent stated in an interview on Fox Business Network that both Washington and Beijing would sign the trade deal soon. "The Kuala Lumpur agreement was finished in the middle of the night last night, so I expect we will exchange signatures possibly as soon as next week," Bessent said, Reuters reported.
- In Asia, the Indian Rupee trades lower against its peers on renewed selling by overseas investors in the Indian stock market. This week, investors turned slightly optimistic on Foreign Institutional Investors (FIIs) returning to the Indian equity market after they bought shares worth Rs. 10,339.80 crores on Tuesday. However, the optimism has started fizzling out as FIIs have pared stake worth Rs. 5,617.75 crores cumulatively on Wednesday and Thursday.
- Going forward, more development on trade talks between the US and India will be a key trigger for the next move in the Indian Rupee. So far top negotiators from both nations have expressed confidence that they will reach a deal soon. However, no announcement has been made yet.
- Meanwhile, Indian equity markets are going through some volatility as the Q2 earnings season has picked up a little pace. So far, earnings from IT companies have remained tepid due to tariff uncertainty in the US economy.
Technical Analysis: USD/INR gains to near 88.85
USD/INR rises to near 88.85 on Friday. The pair returns and strives to hold above the 20-day Exponential Moving Average (EMA), which trades around 88.49. This suggests that the near-term trend has become bullish.
The 14-day Relative Strength Index (RSI) strives to break above 60.00. A fresh bullish momentum would emerge if the RSI sustains above that level.
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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