USD/INR rises at open on bleeding Indian IT stocks refresh fears of foreign outflows
- The Indian Rupee weakens against the US Dollar due to significant FIIs' outflow from the Indian stock market.
- US-Iran tensions have also dampened the appeal of risk-sensitive currencies.
- The US Dollar remains steady even as US inflation cools down.
The Indian Rupee (INR) opens lower against the US Dollar (USD) at the start of the week. The USD/INR pair rises to near 90.70 as the Indian Rupee has come under pressure following a sharp sell-off by overseas investors in the Indian stock market on Friday, resulting in a significant outflow of foreign funds.
On Friday, Foreign Institutional Investors (FIIs) sold shares worth Rs. 7,395.41 crore in the Indian equity market, according to data from the National Stock Exchange (NSE), as fears of Artificial Intelligence (AI) disruption led to a bloodbath in the Information Technology (IT) stocks.
Bleeding Indian IT stocks have dampened the interest of foreign investors once again, who were returning to domestic markets after the confirmation of a trade deal between the United States (US) and India.
In addition to a significant outflow of foreign funds, expectations of higher oil prices due to tensions between the US and Iran are also weighing on the Indian Rupee. The appeal of currencies that rely heavily on imports of oil to meet their energy needs diminished in a high oil price environment.
In Monday’s session, investors will focus on Wholesale Price Index (WPI) Inflation data for January, which will be published at 12:00 PM (IST). Inflation at the wholesale level is estimated to have risen at an annualized pace of 1.25%, faster than 0.83% in December.
Daily Digest Market Movers: US headline inflation cools down to 2.4% YoY
- The upside move in the Indian Rupee is also driven by the US Dollar’s steady performance. As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher near 96.95.
- The US Dollar remains broadly stable at the start of the week as near-term dovish Federal Reserve (Fed) expectations have remained capped despite US inflation cooling at a faster-than-expected pace in January.
- According to the CME FedWatch tool, the possibility of the Fed leaving interest rates steady in the current range of 3.50%-3.75% remains almost unchanged after the US inflation data release.
- The data showed on Friday that the US headline inflation dropped to 2.4% Year-on-year (YoY) from 2.7% in December. Month-on-month (MoM) US headline CPI grew at a slower pace of 0.2% against estimates and the prior reading of 0.3%.
- Chicago Fed President Austan Goolsbee said to Yahoo News after the CPI data release on Friday that CPI readings are encouraging, while the service inflation remains elevated. Goolsbee argued that he wants to see further progress in inflation before supporting the restart of the monetary easing cycle.
- For more cues on the US interest rate outlook, investors will focus on the speech from Fed Governor Michelle Bowman on Wednesday. Fed’s Bowman has been one of the dovish policymakers in the past months.
Technical Analysis: USD/INR strives to return above 20-day EMA
USD/INR jumps to near 90.70 in the opening session on Monday. The price struggles to return above the 20-day Exponential Moving Average (EMA), which trades around 90.73.
The 14-day Relative Strength Index (RSI) wobbles inside the 40.00-60.00 range, indicating a sharp volatility contraction.
As long as the price stays below the 20-day EMA, the door for further downside towards the psychological level of 90.00 remains open. On the upside, the price could rise to the February 2 low of 91.25 once it breaks decisively above the average.
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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