USD/INR opens near all-time highs as Indian Rupee underperforms
- The Indian Rupee slides to an all-time low of around 88.45 against the US Dollar at open on Monday.
- India’s Q2 GDP surprisingly grew at a robust pace of 7.8%.
- The US Dollar declines amid uncertainty ahead of US labor market data.
The Indian Rupee (INR) opens on a positive note near its all-time highs against the US Dollar (USD) at the start of the week. The USD/INR pair trades firmly near 88.45 as the imposition of higher tariffs by the United States (US) on India, and the consistent outflow of foreign funds from Indian stock markets, have battered the Indian Rupee.
In August, Washington raised tariffs on imports from New Delhi to 50% from 25% for buying Oil from Russia, citing that Indian money is funding Moscow’s war in Ukraine. The imposition of higher duties on India by the US has dampened the competitiveness of products made by Indian export-oriented sectors.
On Friday, Foreign Institutional Investors (FIIs) sold a massive amount of Rs. 8,312.66 crores worth of equities in Indian equity markets. Cumulatively, FIIs have pared stake worth Rs. 94,569.6 crores in July and August, after buying Rs. 24,011.43 crores worth of Indian equity in the March-June period of the year.
Meanwhile, the Indian Q2 Gross Domestic Product (GDP) data has come in surprisingly stronger. The data showed on Friday that the economy grew at an annualized rate of 7.8%, faster than the 7.4% increase seen in the first quarter of the year. Economists expected the US GDP growth to come in at 6.6%.
On the global front, the comments from Indian Prime Minister Narendra Modi and Chinese President XI Jinping after a meeting at the Shanghai Cooperation Organisation (SCO) summit over the weekend indicate signs of improving relations between both nations. We are committed to progressing our relations based on mutual respect, trust, and sensitivities," Modi said, Reuters reported.
Daily digest market movers: USD/INR rises despite weakness in US Dollar
- The USD/INR pair continues to trade higher even as the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its losing streak for the fifth trading day amid a holiday in the US on Monday on account of Labor Day. At the time of writing, the USD Index trades close to its monthly low of around 97.70.
- The Greenback faces selling pressure as investors turn cautious, with an array of US labor market-related indicators scheduled to be released this week. Investors will pay close attention to job-related data as it significantly influenced market expectations for the Federal Reserve’s (Fed) monetary policy outlook in early August.
- The speculation for the Fed to cut interest rates in the September policy meeting intensified after the Nonfarm Payrolls (NFP) report for July showed a downward revision in the May and June employment numbers.
- Currently, the CME FedWatch tool shows that there is an 87.6% chance that the Fed will cut interest rates in the policy meeting this month.
- Meanwhile, a slew of Federal Open Market Committee (FOMC) members, including Chair Jerome Powell, have also become concerned regarding an increase in downside labor market risks.
- Another reason behind weakness in the US Dollar is growing concerns over the credibility of US President Donald Trump’s economic policies, and a threat to theFed’s independence.
- On Friday, a panel of judges in Washington stated a verdict against Trump’s tariff agenda, calling them “illegal” and accusing him of wrongfully invoking emergency law. The event has raised concerns over the future of Trump’s international policies. However, market experts believe that Trump will find a way to keep tariffs in place. I doubt it will be market-moving if tariffs are going to stay in place, and even if they are ruled to be illegal, I think Trump will find another legal avenue to implement the tariffs," analysts at Commonwealth Bank of Australia said.
- Last week, the lawsuit filed by Fed Governor Lisa Cook against her termination by US President Trump over mortgage allegations also went into court. Market experts view the event as a serious damage to the Fed’s independence.
Technical Analysis: USD/INR stays above 20-day EMA
USD/INR reclaims all-time highs around 88.45 on Monday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 87.60.
The 14-day Relative Strength Index (RSI) stabilizes above 60.00, suggesting that a fresh bullish momentum has come into effect.
Looking down, the 20-day will act as key support for the major. On the upside, the pair has entered uncharted territory. The round figure of 89.00 would be the key 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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