Indian Rupee rebounds after three-day losing streak against US Dollar
- The Indian Rupee bounces back against the US Dollar after declining for three straight trading days.
- A sharp decline in US Treasury yields has improved investors’ risk appetite.
- US Treasury Department aims to double bond-buying operations to curb higher borrowing costs.
The Indian Rupee (INR) snaps three-day losing streak against the US Dollar (USD) on Thursday. The USD/INR pair corrects to near 95.62 as a sharp decline in long-dated United States (US) bond yields, following the announcement from the Treasury Department that it plans to double its bond-buying operations, has weakened the US Dollar.
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, seems vulnerable near its fresh seven-week low of 98.77 posted on Wednesday.
30-year US Treasury Yields are down almost 2% from Tuesday’s closing price to near 5.18%. Meanwhile, 10-year US Treasury Yields hold onto Wednesday’s losses near 4.64%.
Lower US bond yields improve the appeal of riskier currencies, such as the Indian Rupee.
US Treasury plans to double bond-buyback plan
On late Wednesday, the US Treasury Department announced that it would at least double the maximum size of its liquidity-support buyback operations for longer-dated nominal securities, The Wall Street Journal (WSJ) reported.
According to the report, the current maximum size of $2 billion per operation will be at least $4 billion per operation. The plan to double bond-buying operations aims to curb a sharp increase in borrowing costs.
Many Fed officials support interest rate rise
The Federal Open Market Committee (FOMC) minutes of the July meeting showed on Wednesday that many board members felt the need of interest rate hikes if inflation remains higher. The minutes also showed that “a few opted out of an immediate hike, saying it could avoid the need for further increases later”.
Despite several Fed members supporting the need for a near-term interest rate hike, the odds of the US central bank holding interest rates steady in the September meeting remain unchanged.
According to the CME FedWatch tool, there is a 67% chance that the Fed will leave policy rates unchanged in September, marginally higher from 64% recorded on Tuesday.
Analysts at Jefferies have commented that “economic data released since the meeting meant the minutes now give an outdated economic picture”.
The US economic data for July released this month has shown that there is a reduction in the overall labor force by 23K, and June’s Nonfarm Payrolls (NFP) data was also revised lower. Also, the US headline and core Consumer Price Index (CPI) grew at a moderate pace.
USD/INR Technical Analysis
In the daily chart, USD/INR trades at 95.6350, holding slightly above the 20-period exponential moving average (EMA) at 95.55, which suggests a mildly constructive near-term bias.
The pair has been oscillating in a tight range, and the Relative Strength Index (RSI) at 51.72 sits just above the neutral line, hinting at modest buying interest rather than strong trend conviction.
On the downside, immediate support is seen at the 20-period EMA around 95.55, followed by the August 12 low at 95.29; below that, the August 5 low at 94.83 will be the major cushion for the pair. On the upside, the pair needs to break above the August 19 high at 95.76 decisively to extend the advance towards 96.00.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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