USD/INR extends correction as RBI holds Repo Rate at 5.5%, guides neutral stance
- The Indian Rupee advances against the US Dollar after RBI’s monetary policy announcement.
- The RBI holds the Repo Rate steady at 5.5%, and has guided a neutral stance on the monetary policy outlook.
- US President Trump threatens to raise tariffs on imports from India substantially.
The Indian Rupee (INR) gains sharply against the US Dollar (USD) and its other peers on Wednesday as the Reserve Bank of India (RBI) has left key borrowing rates steady. The RBI keeps its Repo Rate on hold at 5.5%, as expected.
This year, the RBI has already reduced the Repo Rate by 100 basis points (bps) and slashed it by half-a-percent in June for what it called “frontloaded” to boost the economy.
The major reason behind the strength in the Indian Rupee is the “Neutral” stance adopted by the RBI on the monetary policy, citing that price pressures could accelerate going forward. The adaptation of a neutral monetary policy stance by the RBI is contrary to what market experts had projected.
Investors anticipated the RBI to guide a dovish stance on the interest rate outlook at a time when the economy is grappling with trade uncertainty with the United States (US), and inflation numbers have come down significantly.
Trade tensions between the US and India have escalated as New Delhi keeps buying Oil from Russia. Meanwhile, India’s Retail inflation grew moderately by 2.1% in June on year, the lowest level seen in almost six years.
Daily digest market movers: Consistent FIIs outflow keeps Indian Rupee on back foot
- The Indian Rupee gains against its peers on Wednesday after the RBI’s monetary policy outcome. However, its outlook remains uncertain due to the consistent outflow of foreign funds from Indian equity markets. In July, and the first two trading days of August, Foreign Institutional Investors (FIIs) sold Rs. 53,599.59 crores worth of Indian equities cumulatively.
- However, the data on August 5 has indicated that supply from FIIs could start squeezing. On Tuesday, FIIs sold Indian equities worth Rs. 22.48 crores, an amount that is merely 1% of the normal selling observed since the first day of July. FIIs could have hesitated to pare stake on Tuesday, awaiting the RBI’s monetary policy meeting.
- On the global front, trade tensions between the United States (US) and India have escalated further, keeping the Indian Rupee on the back foot. On Tuesday, US President Donald Trump threatened that he will raise tariffs on imports from India substantially, citing New Delhi as not a good trading partner, and criticized it for buying Oil from Russia.
- India has not been a good trading partner, because they do a lot of business with us, but we don’t do business with them. So, we settled on 25% (tariff), but I think I’m going to raise that very substantially over the next 24 hours, because they’re buying Russian oil. They’re fuelling the war machine. And if they’re going to do that, then I’m not going to be happy,” Trump said in an interview with CNBC Squawk Box, The Hindu reported.
- Meanwhile, the US Dollar flattens as investors await the announcement of new candidates by US President Trump for the appointment of Federal Reserve (Fed) Chair Jerome Powell and the replacement of Governor Adriana Kugler after her sudden resignation on Friday.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades quietly near 98.80 at the time of writing.
- "We’re also looking at the Fed chair, and that’s down to four people right now, two Kevins and two other people," Trump said to reporters on Tuesday.
- Market experts believe that decisions from candidates appointed by US President Trump will be biased towards fulfilling his agenda, a scenario that would be unfavorable for the US Dollar and Treasury yields.
- Donald Trump has criticized the Fed, especially Chairman Jerome Powell, a number of times for maintaining a restrictive monetary policy stance.
Technical Analysis: USD/INR holds 20-day EMA
The USD/INR pair slides further to near 87.80 on Wednesday after facing pressure near an all-time high of around 88.25. However, the near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 87.00.
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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