Indian Rupee rebounds, road ahead remains rough
- The Indian Rupee rises against the US Dollar even as oil prices remain higher.
- US President Trump confirmed that the MoU with Iran is over.
- Hawkish FOMC minutes fail to support the US Dollar.
The Indian Rupee (INR) opens higher against the US Dollar (USD) on Thursday. The USD/INR pair drops to near 95.44 as the US Dollar ticks lower; however, the outlook of the pair remains bullish as renewed Middle East hostilities have boosted oil prices.
The higher oil prices narrative is unfavorable for the Indian Rupee, as currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, tend to underperform in a high-oil price environment.
In the opening trade, the MCX Crude Oil contract expiring on July 20 holds onto Wednesday’s gains near Rs.7,115. The MCX Crude Oil contract has gained over 10% from its multi-month low of Rs. 6,505 posted last week.
US-Iran MoU collapses
On Wednesday, United States (US) President Donald Trump announced that the memorandum of understanding (MoU) signed with Iran, aimed at ending the Middle East war, is over, after the exchange of attacks between both nations. The US Central Command launched a series of attacks on Iran’s military infrastructure on Tuesday after Tehran struck three commercial ships transiting through the Strait of Hormuz, a critical chokepoint to almost 20% of global energy supply.
Meanwhile, Middle East hostilities have increased as US military forces have started attacking Iranian infrastructure. Earlier in the day, Iranian state media reported that multiple US artillery shells struck a railway bridge west of Aghala in Golestan, triggering several explosions.
US Dollar drops despite hawkish FOMC minutes
The US Dollar trades marginally lower even as Federal Open Market Committee (FOMC) Minutes of the June policy meeting on Wednesday showed that policymakers continue to see “inflation as the dominant risk”. The minutes also showed that several officials believe further tightening could become necessary.
At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks lower to near 100.95.
FIIs continue to raise stake in Indian stock market
Foreign Institutional Investors (FIIs) continue to increase their stake in the Indian stock market despite renewed geopolitical risks. Overseas investors have remained net buyers in all last four trading days, and have raised their stake worth Rs. 3,954.35 crore.
Technical Analysis: USD/INR rises to near 95.50
USD/INR trades lower at around 95.44 at press time. However, the pair holds a bullish near-term bias as spot hovers above the 20-day exponential moving average (EMA) at 95.10. The pair is also holding the breakout of the Descending Triangle formation, while the Relative Strength Index (RSI) at 54.7 hints at moderately positive momentum rather than overbought conditions.
On the downside, initial support is seen at the 20-day EMA around 95.10, followed by the May 7 low at 94.03. On the topside, the next significant obstacle aligns with the descending resistance trendline starting near 97.08, which caps the broader advance and would need to be overcome to sustain a stronger bullish extension.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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