USD/INR flattens ahead of US Senate vote on federal reopening
- The Indian Rupee trades in a tight range around 88.80 against the US Dollar in Monday’s opening session.
- FIIs turned out to be net buyers in the Indian stock market on Friday.
- Investors await India’s CPI data for October, which will be released on Friday.
The Indian Rupee (INR) trades flat against the US Dollar (USD) at open on Monday. The USD/INR pair consolidates around 88.80 as the US Dollar (USD) trades calmly on hopes that the United States (US) government shutdown will end soon.
At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles around 99.65.
The expectations of an end to the historically longest US federal shutdown were prompted by comments from President Donald Trump while responding to reporters at the White House. "It looks like we’re getting very close to the shutdown. We never agreed to give any substantial money, or any money to prisoners, illegals that come into our country, and I think that the Democrats understand that; and it looks like we’re getting close to the shutdown ending. You’ll know it very soon,” CNN reported.
The report from CNN also showed that the new stopgap bill will extend government funding until January in exchange for the reversal of lay-offs announced during the shutdown.
The US government reopening would improve households’ sentiment, which was hit badly due to the federal closure. On Friday, the preliminary Michigan Consumer Sentiment Index came in at 50.3 in November, the lowest figure seen in three-and-a-half years.
Daily digest market movers: Indian Rupee gains against its peers
- The Indian Rupee trades higher against its major peers on Monday after a decent amount of investment by overseas investors in the Indian stock market on Friday. Foreign Institutional Investors (FIIs) bought shares worth Rs. 4,581.34 crore on Friday after remaining net sellers in the remaining trading days of the last week.
- FIIs turning net buyers on Friday came as a surprise amid the absence of fresh trade talks between the US and India. Foreign investors have maintained distance from the Indian equity market in the past few months as Washington and New Delhi have yet to reach a consensus, a scenario that has dampened the competitiveness of Indian products in the global market.
- This week, the major highlight for the Indian Rupee will be the Consumer Price Index (CPI) data for October, which will be published on Wednesday. India’s retail inflation is expected to have grown 0.48% on an annualized basis, slower than the 1.54% growth seen in September. The expectations of a soft CPI figure are driven by a sustained fall in food prices.
- According to analysts at Bank of America (BofA), “Base effects are most supportive in this month, as it mirrors the sharp increase in vegetable prices we had seen in October last year”.
- Signs of price pressures cooling would boost expectations of further monetary policy easing by the Reserve Bank of India (RBI) this year. So far, this year, the RBI has already reduced its Repo Rate by 100 basis points (bps) to 5.5%.
Technical Analysis: USD/INR consolidates around 88.80
The USD/INR wobbles near 88.80 on Monday. The pair stays above the 20-day Exponential Moving Average (EMA), which trades around 88.63.
The 14-day Relative Strength Index (RSI) strives to return above 60.00. A fresh bullish momentum would emerge if the RSI (14) manages to do so.
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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