USD/INR rallies further as FIIs continue to dump Indian equities
- The Indian Rupee hit a record low near 90.70 against the US Dollar due to the continuous outflow of overseas funds from India.
- Investors expect the RBI to cut its Repo Rate by 25 bps to 5.25% on Friday.
- Weak US ADP Employment data paves the way for more Fed interest rate cuts.
The Indian Rupee (INR) slumps for the seventh trading day in a row against the US Dollar (USD) on Thursday. The USD/INR pair posts a fresh all-time high around 90.70 at open as the Indian Rupee continues to face backlash due to the consistent outflow of foreign funds from the Indian equity market.
Foreign Institutional Investors (FIIs) have not stopped paring their stake in the Indian stock market despite remaining net sellers in the July-November period. In the first trading days of December, FIIs have sold shares worth Rs. 8,020.53 crore cumulatively.
The major reason behind weak sentiment towards the Indian stock market is the absence of a trade deal announcement between India and the United States (US). According to comments from the White House, which came a few months back, India could have been the first nation inking a bilateral deal with Washington, but trade talks were delayed due to India-Pakistan tensions. And, now India is one of few nations who have not entered a trade agreement with the US. Also, tariffs imposed on India by the US are 50%, one of highest among Washington’s trading partners, which have dampened the competitiveness of Indian products in the global market.
A Reuters poll of FX strategists showed this week that the Indian Rupee could gain ground against the US Dollar over the next three months if India and the US agree to a trade deal. The poll also showed that the pair could decline 0.3% to near 89.65 in the coming 12 months.
On the domestic front, investors await the monetary policy announcement by the Reserve Bank of India, which is scheduled for Friday. The RBI is expected to cut its Repo Rate by 25 basis points (bps) to 5.25%. This year, the RBI has already reduced its Repo Rate by 100 bps as inflationary pressures have remained lower.
Daily digest market movers: Firm Fed dovish bets keep US Dollar on backfoot
- Though investors have underpinned the US Dollar against the Indian Rupee, the former is underperforming its other peers amid firm expectations that the Federal Reserve (Fed) will cut interest rates in its next week’s monetary policy.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 99.00. Still, the DXY is close to its fresh monthly low of 98.80 posted on Wednesday.
- 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 policy meeting is 89%.
- Traders are increasingly confident that the Fed will cut interest rates next week as US labor market conditions seem to be worsening further. The US ADP reported on Wednesday that private employers fired 32K jobs in November, while they were expected to have added 5K fresh workers.
- Signs of weakening labor demand often underpin the need to ease monetary policy. Lately, a significant number of Federal Open Market Committee (FOMC) members have also expressed the need to cut interest rates further to support the job market.
- “I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions, adding that there is room for a further adjustment in the near term,” New York Fed Bank President John Williams said in late November. Williams supported the need for further monetary policy expansion, citing that the "economic growth has slowed and the labor market gradually cooled."
- For more cues on the US interest rate outlook, investors will focus on the Personal Consumption Expenditure Price Index (PCE) data for September, which will be released on Friday. However, the impact of the Fed’s preferred inflation gauge is expected to be limited as the data is older, and therefore will be insufficient to indicate the current status of inflation.
Technical Analysis: USD/INR approaches 91.00
USD/INR trades around 90.70 in the opening trade on Thursday. The 20-day Exponential Moving Average (EMA) near 89.40 keeps rising, and price holds above it, reinforcing a bullish short-term tone.
RSI at 76.14 is overbought, flagging stretched momentum that could prompt consolidation. Initial support is the 20-day EMA; above this gauge, the uptrend would stay in place.
The 20-day EMA slope has accelerated in recent sessions, confirming trend strength and suggesting buyers retain control on pullbacks. On the upside, the pair could extend its rally towards 91.00.
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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