USD/INR continues to trade flat as RBI remains defensive
- The Indian Rupee continues to trade in a confined range around 89.00 for the past two weeks.
- India’s Commerce and Industry Minister Goyal expresses confidence that the US and India will reach a trade agreement.
- The FOMC minutes showed that most participants stated that it is appropriate to cut interest rates.
The Indian Rupee (INR) opens again in a two-week-long range of 88.76-89.11 against the US Dollar (USD) on Thursday. The struggle from the USD/INR pair to extend its upside above the all-time high of 89.11 continues as the Reserve Bank of India (RBI) keeps intervening in currency markets to defend the Indian Rupee.
The Indian currency has been trading in a narrow range near all-time lows, with the RBI’s persistent dollar sales helping to anchor volatility. Bankers expect the central bank to continue smoothing moves, Reuters reported.
However, investors brace for significant volatility in the Indian Rupee when the RBI rolls back its support.
The Indian Rupee has remained on the back foot as the competitiveness of Indian products in global markets diminished due to higher tariffs on imports from India to the United States (US). Washington is charging a 50% import duty on products from New Delhi as a penalty for buying oil from Russia.
Meanwhile, Commerce and Industry Minister Piyush Goyal expressed confidence, while responding to reporters on Tuesday during his visit to Qatar, that his team is in constant dialogue with negotiators from Washington and both nations would reach a trade agreement within the November deadline, ANI News reported. Goyal added that the next round of trade talks has not been scheduled yet as the US government is in a shutdown mode.
On the foreign investment flow front, overseas investors turned out to be net buyers in the Indian stock market for the second consecutive day on Wednesday. However, the size of investment was small as Foreign Institutional Investors (FIIs) pumped Rs. 81.28 crores in Indian equity markets.
Daily digest market movers: FOMC minutes signal dovish interest rate outlook
- A slight corrective move in the US Dollar has also restricted the USD/INR pair from extending its rally further. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% lower to near 98.70. On Wednesday, the USD Index posted a fresh two-month high near 99.00 as its safe-haven demand increased on recent political developments in Japan and France.
- Rally in the US Dollar has halted for now as dovish Federal Open Market Committee (FOMC) minutes of the September policy meeting and the ongoing US government shutdown are a major drag.
- The FOMC minutes showed on Wednesday that a majority of members signaled that it is appropriate for the Fed to pivot to neutral rates as “downside risks to employment to have increased, while upside risks to inflation had either diminished or not increased”. The minutes also showed that almost all participants voted for a 25 basis points (bps) interest rate reduction, while one favoured a bigger size cut.
- According to the CME FedWatch tool, traders remain extremely confident that the Fed will cut interest rates again in the policy meeting later this month and see a 78.6% chance of one more in the December meeting.
- Meanwhile, the ongoing US government closure is weighing on the economic outlook amid fears that the White House would be forced to cut programs and announce lay-offs in federal agencies. On Tuesday, US President Donald Trump announced that the White House could eliminate a string of government plans amid ongoing government closure and would provide details on laying off employees in the next four or five days.
- Going forward, investors will focus on the preliminary Michigan Consumer Sentiment Index and Consumer Inflation Expectations data for October, which is scheduled for Friday.
Technical Analysis: USD/INR remains above 20-day EMA
USD/INR continues to trade in a tight range between 88.76 and 89.11 for over two weeks. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 88.67.
The 14-day Relative Strength Index (RSI) stays above 60.00, suggesting a strong bullish momentum.
Looking down, the pair could slide to near the September 12 high of 88.57 and the 20-day EMA, if it breaks below the September 25 low of 88.76.
On the upside, the pair could extend its rally towards the round figure of 90.00 if it breaks above the current all-time high of 89.12.
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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