Indian Rupee weakens for the second day as PMI disappoints, focus shifts to US data
- The USD/INR edges higher amid a steady US Dollar and downbeat Indian services PMI signals.
- India’s May Composite PMI eases; Services PMI revised lower but remains expansionary.
- Traders' eyes are on US labor and services data, and the RBI’s rate decision due on Friday.
The Indian Rupee (INR) weakens against the US Dollar (USD) for the second straight day on Wednesday, as a firmer Greenback and disappointing Indian PMI figures weigh on sentiment. At the time of writing, the USD/INR pair is trading near 85.88, extending gains after Tuesday’s upward move and reflecting renewed pressure on the Rupee amid signs of slowing activity in India’s services sector.
The latest PMI readings painted a downbeat picture of India’s economic activity. The HSBC India Composite Purchasing Managers’ Index (PMI) fell to 59.3 in May, down from the flash estimate of 61.2 but slightly higher than April’s 59.7 reading, indicating a modest slowdown in overall business activity. The decline was largely driven by softer factory output. Meanwhile, the Services PMI was revised lower to 58.8 from the preliminary forecast of 61.2, though it still marked an improvement over April’s 58.7 and the strongest expansion since February, supported by robust growth in new orders and business activity.
Elevated crude Oil prices continue to be a headwind for the Indian Rupee, particularly given India’s position as the world’s third-largest oil consumer. Rising energy costs not only strain the country’s import bill but also fuel inflationary pressures, often leading to a weakening of the Indian Rupee.
On the equities front, market performance was mixed — the BSE Sensex gained 260.74 points, to close at 80,998.25, while the Nifty 50 slipped 77.70 points, to 24,620.20. Additionally, foreign institutional investors (FIIs) offloaded ₹2,853.83 crore worth of Indian equities on Tuesday, adding to the downward pressure on the Indian Rupee.
In the US front, private sector employment rose by 37,000 in May, according to Automatic Data Processing (ADP) on Wednesday. This reading followed the 60,000 increase recorded in April and fell short of the market expectation of 115,000 by a wide margin.
Looking ahead, traders will be eyeing the ISM Services PMI, due later on Wednesday, for fresh cues on the Federal Reserve’s (Fed) policy outlook. Meanwhile, attention is also focused on the Reserve Bank of India's (RBI) Monetary Policy Committee meeting, which is scheduled to conclude on Friday. While markets largely expect a 25 basis point (bps) interest rate cut to bring the repo rate to 5.75%, a recent State Bank of India (SBI) research has hinted at a possible 50 bps cut aimed at reviving the credit cycle and cushioning the economy against external headwinds. The outcome of both events will be crucial in shaping the Indian Rupee’s near-term trajectory.
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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