USD/INR weakens on potential US-India trade talks
- Indian Rupee gathers strength in Monday’s Asian session.
- Potential US-India trade deals and lower oil prices support the INR, but cross-border tensions might cap its upside.
- Traders await the US April ISM Services PMI report due later on Monday.
The Indian Rupee (INR) gains ground on Monday. The positive developments surrounding the US-India trade deal boost sentiment, supporting the Indian currency. Additionally, the fall in crude oil prices lifts the INR as India is the world's third-largest oil consumer.
Nonetheless, the rising tensions between India and Pakistan could drag the local currency lower. Pakistan's military said in a statement on Saturday that it had conducted a training launch of a "surface-to-surface missile with a range of 450 kilometers.” New Delhi has accused Islamabad of backing an attack on tourists in Kashmir last month.
Looking ahead, the US April ISM Services Purchasing Managers Index (PMI) will be the highlight on Monday. The attention will shift to the Federal Reserve (Fed) interest rate decision on Wednesday, which is expected to keep rates unchanged.
Indian Rupee remains firm, bolstered by US-India trade talks and lower crude oil prices
- India’s foreign exchange reserves climbed by $1.983 billion to $688.129 billion during the week ended April 25, marking the eighth consecutive weekly increase, according to the Reserve Bank of India (RBI) on Friday.
- The RBI will buy bonds worth 750 billion rupees ($8.88 billion) this week, followed by two more purchases of 250 billion rupees later in the month.
- So far this year, it has purchased bonds worth 3.65 trillion Rupees via OMOs and 388 billion rupees in secondary market debt transactions. This unexpected liquidity injection is likely to aid policy transmission and boost growth amid global uncertainties, said Radhika Rao, executive director and senior economist at DBS Bank.
- The Indian economy is estimated to grow at a steady 6.6% in the financial year 2025–26, according to Deloitte’s latest forecast.
- The US Nonfarm Payrolls (NFP) rose by 177K in April, according to the US Bureau of Labor Statistics (BLS) on Friday. This figure followed the 185K increase (revised from 228K) seen in March and came in above the market consensus of 130K.
- The US Unemployment Rate remained unchanged at 4.2% in April, as expected. The Average Hourly Earnings held steady at 3.8% YoY in the same reported period. Finally, the Labor Force Participation Rate ticked up to 62.6% in April from 62.5% in March.
- Markets are now pricing in nearly 37% odds of a Fed cut in June, down from 64% a month ago. Goldman Sachs and Barclays both shifted their cut calls to July from June.
USD/INR’s bearish bias lingers, oversold RSI warrants caution
The Indian Rupee strengthens on the day. The USD/INR pair keeps the bearish tone on the daily chart, with the price holding below the key 100-day Exponential Moving Average (EMA). The 14-day Relative Strength Index (RSI) moves below the 30.00 mark, indicating oversold conditions. This suggests that further consolidation or a temporary recovery cannot be ruled out.
A decisive break below the limit of the descending trend channel potentially sets its sights back down to 84.22, the low of November 25, 2024. Any follow-through selling below the mentioned level could see the next contention level at 84.08, the low of November 6, 2024.
On the flip side, the first upside target to watch is 85.14, the low of April 23, followed by 85.70, the 100-day EMA. A break above this zone could point to a possible trend reversal and pave the way 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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