USD/INR trades steadily ahead of India/US flash PMI data
- The Indian Rupee opens on a stable note against its major peers ahead of India’s flash private sector PMI data.
- Traders pare Fed dovish bets amid upside inflation risks.
- The US Unemployment Rate rose to 4.4% in September.
The Indian Rupee (INR) opens calmly against its major peers on Friday ahead of India’s preliminary HSBC Purchasing Managers’ Index (PMI) data for November, which will be published at 05:00 GMT (10:30 IST).
Investors will pay close attention to India’s private sector PMI figures to get cues about the impact of Goods and Services Tax (GST) rate cuts on the manufacturing industry. The PMI report would demonstrate the impact of GST cuts on the overall consumption trend.
On a broader note, the Indian Rupee has been underperforming as the United States (US) and India have not yet reached a trade deal despite negotiators from both nations having been in discussions for months. However, they have stated that a bilateral pact will be announced soon.
Earlier this month, US President Donald Trump stated that he will reduce tariffs on imports from India “at some point in time”. Currently, Washington is charging 50% tariffs on imports coming from New Delhi, which includes a 25% additional levy as a penalty for buying Oil from Russia.
On the monetary policy front, market experts have become confident that the Reserve Bank of India (RBI) will reduce interest rates in its upcoming monetary policy in December. "On monetary policy, we expect the RBI to cut the Repo rate by 25 basis points (bps) to 5.25% in the policy meeting next month amid inflation undershooting the central bank’s 2%-6% tolerance range,” analysts at Morgan Stanley said.
Daily digest market movers: Receding Fed dovish bets strengthen US Dollar
- The Indian Rupee trades cautiously at open against the US Dollar (USD) as the latter holds onto its week-long recovery move inspired by receding dovish Federal Reserve (Fed) expectations.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades calmly around 100.36, the highest level seen in over five months.
- Traders started paring dovish Fed bets as Federal Open Market Committee (FOMC) members had been stressing to keep the monetary policy somewhat restrictive to bring inflation sustainably to the 2% target.
- The FOMC minutes of the October policy meeting also showed that many policymakers are not comfortable with the option of reducing interest rates again in December, as it would dampen trust of households towards the central bank’s commitment to bring inflation down.
- According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting is 35.5%. Fed dovish bets accelerated slightly from 30%, recorded on Wednesday, after the release of the US Nonfarm Payrolls (NFP) data for September.
- The US NFP report showed on Thursday that the Unemployment Rate rose to 4.4% from estimates and the prior reading of 4.3%. Meanwhile, job creation remained robust as employers added a fresh 119K workers.
- After the US NFP data release, Cleveland Fed President Beth Hammack stated that the official employment is a “bit stale”, as it was delayed due to the government shutdown, and the monetary policy must be focused on reducing inflation. “Jobs report is a bit stale but is in line with expectations, while high inflation is still a real issue for the economy,” Hammack said.
- In Friday’s session, investors will focus on the flash US S&P Global PMI data for November, which will be published at 14:45 GMT.
Technical Analysis: USD/INR holds key 20-day EMA
The USD/INR pair ticks down to near 88.80 at open on Friday. The 20-day Exponential Moving Average (EMA) near 88.70 continues to act as key support for USD bulls.
The 14-day Relative Strength Index (RSI) rebounds towards 60.00. A decisive break by the RSI above that level would trigger a bullish momentum.
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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