Indian Rupee ticks up at start of RBI’s policy week
- The Indian Rupee edges up against the US Dollar as traders reassess hawkish Fed bets.
- The US Dollar and US Treasury Yields remain firm despite hawkish Fed prospects cool down.
- Investors keenly await the RBI’s monetary policy.
The Indian Rupee (INR) opens marginally higher against the US Dollar (USD) at the start of the Reserve Bank of India’s (RBI) monetary policy week. The USD/INR pair ticks down to near 96.25 as traders have trimmed Federal Reserve (Fed) interest rate expectations for the policy meeting this month, a scenario that improves the appeal of riskier assets, such as the Indian Rupee.
According to the CME FedWatch tool, the odds of the Fed leaving interest rates unchanged in the October policy meeting have increased to 82.3% from 35.8% seen last week.
Financial markets scale back hawkish Fed expectations after the release of the United States (US) Nonfarm Payrolls (NFP) data for September, which showed a moderate job growth.
What US NFP report showed
On Friday, the US Bureau of Labor Statistics (BLS) showed that the economy created 29K fresh jobs in September, fewer than 90K estimates and the previous reading of 133K, revised lower from 162K. The Unemployment Rate increased to 4.2%, while it was expected to remain steady at 4.1%.
Average Hourly Earnings, a key measure of wage growth, grew by 3% Year-on-Year (YoY), unexpectedly slower than the August reading of 3.1%. The data was expected to rise at a faster pace of 3.2%.
Moderate job wage growth forced financial markets to reassess their hawkish Fed expectations.
However, US Treasury Yields and the US Dollar remain firm due to elevated inflation projections and French fiscal risks.
As of writing, 10-year US Treasury Yields are marginally down at around 5.27% but not so far from its two-decade high of 5.34% posted last week. In the Asian trade, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, posts a fresh yearly high near 102.53.
Higher US Treasury Yields and the US Dollar could weigh on the Indian currency in the near term.
RBI’s monetary policy awaited
This week, the major trigger for the Indian Rupee will be the RBI’s monetary policy announcement on Wednesday.
Analysts at MUFG/BTMU reiterate that they are “officially forecasting RBI to keep rates on hold,” but emphasise that “more importantly we have already been calling for the central bank to start its hiking cycle from December so ultimately we think it’s just a matter of time before policy rates move higher.” They “see a good chance RBI will also move its stance away from neutral to signal a tightening bias,” underscoring a shift in the policy signal even if the near-term decision is unchanged.
In terms of the projected magnitude, MUFG/BTMU note that “we have 50bps of rate hikes in our forecast profile, and have mentioned that there could be a risk of 75bps in total this cycle,” pointing to a backdrop where “growth is strong, liquidity is abundant, credit growth is picking up, fiscal policy is supportive, while higher commodity prices and adverse weather conditions lend inflation risk to the upside in India.” They add that “we are forecasting RBI to hike rates by 50bps this cycle with some risk of 75bps, although we note pricing in the rates market is quite rich already,” suggesting that markets may already be pricing in a relatively aggressive tightening path.
USD/INR Technical Analysis
In the daily chart, USD/INR trades at 96.25, maintaining a bullish near-term bias as spot holds above the 50-period exponential moving average (EMA) at 95.59. The pair is consolidating near recent highs, and the Relative Strength Index (14) at 63.26 is approaching overbought territory, suggesting that upside momentum is strong but could be nearing a stretched zone.
On the downside, initial support is located at the 50-day EMA at 95.59, where any pullback would likely be tested before deeper losses emerge. On the upside, the pair aims to revisit the all-time high near 97.00
(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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