USD/INR trades firmly as Trump threatens 25% tariffs on India
- The Indian Rupee underperforms the US Dollar as the US threatens 25% tariffs and a penalty on imports from India.
- Traders pare Fed dovish bets as Powell warns of inflation risks.
- Investors await the US ISM PMI data for July.
The Indian Rupee (INR) holds onto losses against the US Dollar (USD) at open on Thursday. The USD/INR trades firmly to near 88.80 as the Indian currency weakens, following United States (US) President Donald Trump’s announcement of a 25% tariff on imports from India, along with an unspecified penalty for buying Oil and military equipment from Russia.
On Wednesday, US President Trump dictated the tariff rate for India through a tweet on Truth.Social, which will become effective from the August 1 deadline. While describing India as a friend, Trump criticized the Asian giant for buying defence equipment and energy products from Russia amid its ongoing war with Ukraine, and for imposing the highest tariffs on the US among its key trading partners.
“India have always bought a vast majority of their military equipment from Russia, and are Russia’s largest buyer of ENERGY, at a time when everyone wants Russia to stop. India will therefore be paying a tariff of 25%, plus a penalty for the above, starting on August 1”, Trump wrote.
Meanwhile, the Indian government has responded that the administration will take all steps necessary to “secure our national interest” while remaining committed to "concluding a fair, balanced and mutually beneficial bilateral trade agreement", BBC News reported.
The impact of Trump’s tariffs on imports from India is also visible on Indian equity markets, which had already been facing the wrath of consistent selling by Foreign Institutional Investors (FIIs). In July, FIIs have sold Rs. 42,077.77 crores worth of shares. Moderate quarterly earnings growth from India Inc. and global trade uncertainty remained key drivers behind weakness in Indian markets.
Daily digest market movers: Indian Rupee stays on back foot against US Dollar
- A continuous upside move in the USD/INR pair is also driven by sheer strength in the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near a fresh two-month high of around 99.80 posted on Wednesday.
- The US Dollar strengthens as traders pare bets supporting interest rate cuts by the Federal Reserve (Fed) in the policy meeting in September. According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September meeting has diminished to 43.2% from 63.3% seen on Tuesday.
- Traders pare Fed dovish bets as Fed Chair Jerome Powell guided that the current interest rate stance is “appropriate” to guard against “upside inflation risks” in the press conference on Wednesday, after supporting leaving borrowing rates in the current range of 4.25%-4.50%.
- Another reason behind the strength in the US Dollar is the upbeat preliminary Q2 Gross Domestic Product (GDP) and ADP Employment Change data for July. The US Bureau of Economic Analysis (BEA) showed on Wednesday that the economy grew at a robust pace of 3% on an annualized basis, compared to estimates of 2.4%. In the first quarter of the year, the US GDP declined by 0.5%.
- Meanwhile, the ADP reported that the private sector added 104K fresh workers, significantly higher than the estimates of 78K. In June, the labor force was reduced by 23K employees.
- Going forward, investors will focus on the ISM Manufacturing PMI data for July, which will be published on Friday.
- On the global front, Washington has closed a deal with South Korea at a 15% tariff rate.
Technical Analysis: USD/INR stays above 20-day EMA
USD/INR trades firmly near a fresh five-month high of around 87.80 at open on Thursday. The pair trades firmly as the 20-day Exponential Moving Average (EMA) slopes higher to near 86.63, indicating a strong uptrend.
The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting a strong bullish momentum.
Looking down, the 20-day EMA will act as key support for the major. On the upside, the February 10 high around 88.15 will be a critical hurdle for the pair.
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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