USD/INR opens higher ahead of Fed’s monetary policy
- The Indian Rupee weakens at open against the US Dollar ahead of the Fed’s monetary policy announcement.
- The Fed is almost certain to cut interest rates by 25 bps to 3.75%-4.00%.
- FIIs bought Rs. 10,339.80 crores worth of shares in the Indian stock market on Tuesday.
The Indian Rupee (INR) declines at open against the US Dollar (USD) on Wednesday. The USD/INR jumps to near 88.50, while the US Dollar trades slightly higher ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges up to near 98.80.
According to the CME FedWatch tool, traders have priced in a 25-basis-point (bps) interest rate reduction by the Fed that will push the Federal Fund rate to 3.75%-4.00%. Therefore, the major trigger for the US Dollar will be monetary policy guidance by the Fed for the last policy meeting of the year in December.
Market participants expect the Fed to deliver a dovish stance on the monetary policy outlook as the impact of US tariffs on inflation has not appeared to be persistent, labor market conditions continue to deteriorate, and the federal shutdown enters its fourth week.
The US Consumer Price Index (CPI) data for September showed on Friday that monthly headline and core inflation grew moderately by 0.3% and 0.2%, respectively. The same day, the flash S&P Global PMI report for October showed that while employment growth picked up, the pace of job creation remained only modest, and weakened especially in manufacturing. Job growth was limited by a worsening of business confidence, principally reflecting ongoing concerns over the impact of government policies such as tariffs.
Indian Rupee underperforms despite robust FIIs buying in Indian stock market
- The Indian Rupee trades lower against its currency peers, except European currencies, on Wednesday. The Indian currency weakens even as overseas investors have pumped a significant amount of investment in the Indian stock market on Tuesday. Foreign Institutional Investors (FIIs) bought Rs. 10,339.80 crores worth of equity shares on Tuesday, the highest amount of one-day purchase seen in a few months.
- In the July-September period, FIIs sold shares worth Rs. 1,29,870.96 crores in the Indian equity market. The major reason behind the outflow of a significant chunk of foreign flows was trade frictions between the US and India.
- US President Donald Trump raised tariffs on imports from India to 50% as a penalty for buying oil from Russia. Trump criticized India for buying Russian oil, stating that money flowing to Moscow against energy sales is being utilized to fund the war in Ukraine.
- Meanwhile, easing trade tensions between the two nations has improved the sentiment of foreign investors towards India. This weekend, a Bloomberg report showed that negotiators from both nations have agreed on almost all issues, and a deal could be announced soon.
- On the global front, investors await the high-stakes trade talks between US President Trump and Chinese leader Xi Jinping in South Korea on Thursday. Ahead of the meeting, Trump has expressed that fentanyl-tied tariffs imposed on Beijing would come down. “I expect to be lowering that because I believe they’re going to help us with the fentanyl situation,” Trump said to reporters at Air Force One.
- Earlier this week, US Treasury Secretary Scott Bessent also expressed confidence that 100% additional tariffs recently imposed by Washington on Beijing would be rolled back, and China might also defer rare earth export controls.
Technical Analysis: USD/INR gains to near 88.50
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USD/INR rises to near 88.50 at open on Wednesday. The pair strives to return above the 20-day Exponential Moving Average (EMA), which trades around 88.41.
The 14-day Relative Strength Index (RSI) recovers sharply from 40.00, suggesting buying interest at lower levels.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the all-time high of 89.12 will be a key barrier.
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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