USD/INR weakens ahead of FOMC Minutes
- Indian Rupee edges higher in Wednesday’s early Asian session.
- Lower crude oil prices and a weaker US Dollar support the INR, but MSCI-driven outflows might cap its upside.
- Traders will closely monitor the FOMC Minutes, which will be released later on Wednesday.
The Indian Rupee (INR) strengthens on Wednesday. Concerns over US trade and fiscal policies undermine the US Dollar (USD). Additionally, a decline in Crude oil prices provides some support to the Indian currency, as India is the world's third-largest oil consumer.
Nonetheless, foreign outflows worth $900 million from Zomato due to MSCI index rebalancing, along with the expectations of interest rate cuts by the Reserve Bank of India (RBI), could weigh on the local currency. The month-end US Dollar (USD) demand from local companies and foreign banks might also contribute to the INR’s downside.
Traders await the release of India’s April Industrial Output and Manufacturing Output, which are due later on Wednesday. On the US docket, the Minutes of the Federal Open Market Committee (FOMC) will be in the spotlight. Also, the Richmond Fed Manufacturing Index for May will be published.
Indian Rupee gains ground despite a decline in equities
- The local currency was expected to be in a range of 84.75 to 85.50, with an expectation of a Zomato outflow of $900 million due to the MSCI rebalancing, according to Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP.
- The US Consumer Confidence Index climbed to 98.0 in May from 86.0 (revised from 85.7), according to the Conference Board on Tuesday.
- US Durable Goods Orders declined by 6.3% in April, compared to a 7.6% increase in March (revised from 9.2%), the US Census Bureau showed on Tuesday. This figure came in above the market consensus of -7.9%.
- Federal Reserve (Fed) Bank of Minneapolis President Neel Kashkari said on Tuesday, "There's no question the shock of tariffs is stagflationary.” Kashkari added that the officials should keep interest rates steady until there is more clarity on how higher tariffs affect inflation.
USD/INR retains a bearish bias under the key 100-day EMA
The Indian Rupee trades firmer on the day. The USD/INR pair paints a negative picture on the daily chart, with the price holding below the key 100-day Exponential Moving Average (EMA). Further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) hovers around the midline, indicating neutral momentum in the near term.
USD/INR seems to be finding some support near 84.78, the low of May 26. Sustained trading below this level could lead to a retest of 84.61, the low of May 12. The next bearish target to watch is 84.00, the psychological level and the lower limit of the trend channel.
On the other hand, the first upside barrier for the pair is seen at 85.55, the 100-day EMA. A decisive break above the mentioned level could pave the way to 85.75, the upper boundary of the trend channel. The additional upside filter is located at 85.10, the high of May 22.
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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