USD/INR gathers strength on bets for more RBI rate cuts
- Indian Rupee edges lower in Tuesday’s Asian session.
- Dovish bets for the RBI weigh on the INR, but a multi-phase US-India trade deal might cap its losses.
- Investors brace for the Fedspeak later on Tuesday.
The Indian Rupee (INR) weakens on Tuesday. Consumer inflation in India fell more than expected to a near six-year low in April, strengthening bets that the Reserve Bank of India (RBI) is due to extend its rate cutting cycle. This, in turn, undermines the Indian currency. Additionally, renewed concerns over the potential reintroduction of trade tariffs by the Trump administration could exert some selling pressure on the Asian peers, including the INR.
Nonetheless, a decline in crude oil prices might help limit the local currency’s losses, as India is the world's third-largest oil consumer. Lower crude oil prices tend to have a positive impact on the INR value. A multi-phase trade deal between the US and India could also underpin the local currency.
Investors will monitor the Fedspeak later on Tuesday. The following Federal Reserve (Fed) officials are set to speak, including Thomas Barkin, Alberto Musalem, Adriana Kugler, Raphael Bostic, Mary C. Daly and Beth M. Hammack.
Indian Rupee remains weak amid trade deal discussions
- India is discussing a US trade deal structured in three tranches and expects to reach an interim agreement before July, when Trump’s reciprocal tariffs are set to kick in, per Bloomberg.
- The interim deal would most likely cover areas including market access for industrial goods, some farm products, and addressing some non-tariff barriers, such as quality control requirements, the people said, asking not to be identified because the discussions are private.
- ICRA on Monday forecast India's GDP growth at 6.9% in the quarter ended March 31, and at 6.3% for the full 2024-25 fiscal year, undershooting the National Statistics Office (NSO) estimates made in February.
- Moody’s lowered the US rating from 'Aaa' to ‘Aa1’, citing that successive US administrations had failed to reverse ballooning deficits and interest costs.
USD/INR keeps the bearish vibe under the key EMA
The Indian Rupee trades on a softer note on the day. The bearish outlook of the USD/INR pair remains in place as the price remains capped below the key 100-day Exponential Moving Average (EMA) on the daily chart. Nonetheless, further consolidation or temporary recovery cannot be ruled out as the 14-day Relative Strength Index (RSI) hovers around the midline.
The first downside target to watch for USD/INR is 85.00, the psychological level. If the price breaks below the mentioned level, the pair could revisit 84.61, the low of May 12, followed by 84.20, the lower limit of the trend channel.
On the other hand, sustained trading above the 100-day EMA at 85.60 could open the door for a move toward the 86.00-86.05 zone, which marks both a round figure and the upper boundary of the trend channel.
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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