USD/INR slumps on inflows and US Dollar sales
- Indian Rupee gathers strength in Friday’s Asian session.
- Possible equity inflows and US Dollar sales underpin the INR, but geopolitical risks might cap its upside.
- The US April employment data will take center stage later on Friday.
The Indian Rupee (INR) extends the rally on Friday. Foreign portfolio inflows into Indian equities and increased hedging-related US Dollar (USD) sales from local exporters boost the Indian currency. Additionally, optimism surrounding a potential trade agreement between the US and India contributes to the INR's upside.
However, the surge in tensions between India and Pakistan could undermine the local currency. Pakistan claims it has “credible intelligence” that India is planning imminent military action, a week after an attack that killed 26 people in the India-administered Kashmir.
Investors will closely watch the US April employment data later on Friday, including the Nonfarm Payrolls (NFP), the Unemployment Rate and Average Hourly Earnings. The NFP is expected to show 130K job additions in April, while the Unemployment Rate is estimated to remain at 4.2%.
Indian Rupee remains strong amid positive domestic markets
- The Indian Rupee's performance in March marked an appreciation of over 2%, its strongest monthly performance since November 2018. MUFG Bank noted, "A weaker US dollar, along with the market becoming more dovish on the US rates outlook, could provide some support for several Asian currencies."
- US President Donald Trump announced potential trade deals with India, South Korea, and Japan, seeking to convert his tariff policy into trade agreements.
- US trade representative Jamieson Greer said late Wednesday that US President Donald Trump’s administration expects to conclude initial tariff deals with some US trading partners within weeks.
- US weekly Initial Jobless Claims for the week ended April 26 rose by 241,000, compared to the previous week of 223K (revised from 222K), according to the US Department of Labor on Thursday. This reading came in above the market consensus of 224K.
- US ISM Manufacturing Purchasing Managers’ Index (PMI) declined to 48.7 in April from 49.0 in March. This figure was stronger than the expectation of 48.0.
- The US economy contracted at an annualised rate of 0.3% in the first quarter (Q1) of 2025, according to the US Commerce Department on Thursday. This figure came in weaker than the estimation of 0.4% and down from the previous reading of a 2.4% expansion.
- Futures contracts see the Fed to start rate cuts in June, with a total of four quarter-point reductions expected, lowering the rate to the 3.25%-3.50% band by year-end.
USD/INR keeps the bearish vibe, oversold RSI warrants caution for bears
The Indian Rupee strengthens on the day. The USD/INR maintains its negative outlook on the daily timeframe, with the price holding below the key 100-day Exponential Moving Average (EMA). Nonetheless, the 14-day Relative Strength Index (RSI) moves below the 30.00 mark, indicating oversold conditions and warranting some caution. This suggests that further consolidation or a temporary recovery is on the cards.
A breach of the lower limit of the descending trend channel would bring USD/INR to 84.22, the low of November 25, 2024. If the pair continues to see red candlesticks and sustains price action below the mentioned level, we might see a drop to 84.08, the low of November 6, 2024.
On the other hand, the immediate resistance level to watch is 85.14, the low of April 23. Sustained trading above this level could pave the way to 85.72, the 100-day EMA, en route to 86.25, 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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