Indian Rupee extends decline amid elevated oil prices
- The Indian Rupee drops further against the US Dollar as crude oil prices remain higher.
- Iran reaffirms its stance despite the US threatening to attack Iranian infrastructure.
- Traders trim hawkish Fed bets as US inflation cools down on both the retail and wholesale levels.
The Indian Rupee (INR) opens lower against the US Dollar (USD), extending its losing streak for the third trading day on Thursday. The USD/INR pair rises to near 96.32 as elevated crude oil prices have renewed fears of higher foreign outflows. The continued military aggression between the United States (US) and Iran in the Middle East has disrupted the energy supply again.
In the opening trade, the MCX Crude Oil contract expiring on July 20 is up 0.7% to near Rs. 7,664, closer to its monthly high of Rs. 7,832.
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.
US strikes Iran again to keep Hormuz open
Earlier in the day, the US Central Command (CENTCOM) announced that it launched another wave of strikes against Iran in a further effort to keep the Strait of Hormuz, a critical chokepoint to almost one-fifth of global energy supply, open.
The ongoing aggression in the Middle East is unlikely to stop anytime soon, as Iran has shut the door on US threats to attack Iranian infrastructure.
US President Donald Trump said in an interview with Fox News on Wednesday that he will authorize military forces to strike Iran’s bridges and power plants next week if the nation doesn’t come to the table for negotiations.
In response, Iran’s top negotiator and parliamentary speaker Mohammed Bagher Ghalibaf said that the country has “never welcomed war, nor do we now," adding that “we must always be prepared for battle and stand firm to protect our national security and interests."
Easing hawkish Fed bets batter US Dollar
The US Dollar gains temporary ground in the Asian trade on Thursday, but has been battered badly in the last two trading days. At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades marginally higher to near 100.52, closer to its almost four-week low of 100.35 posted on Wednesday.
Traders dialing down Federal Reserve (Fed) interest rate hike expectations on the back of easing US inflationary pressures have weakened the US Dollar. Both the US Consumer Price Index (CPI) and Producer Price Index (PPI) reports for June have shown that price pressures cooled down significantly.
According to the CME FedWatch tool, the odds of the Fed delivering an interest rate hike in the meeting later this month have dropped significantly to 10.2% from 31% recorded a week ago.
FIIs remain net sellers for three consecutive trading days
Foreign Institutional Investors (FIIs) turned out to be net sellers on Wednesday, extending their selling streak for the third trading day. On Wednesday, overseas investors pared their stake worth Rs. 735.83 crore. The sentiment of foreign investors appears to be dampening due to elevated crude oil prices.
Technical Analysis: USD/INR approaches all-time high at 97.10
USD/INR trades higher at around 96.35 at press time, keeping a clear bullish near-term bias as price holds above the 20-period Exponential Moving Average (EMA) at 95.47. The fact that spot remains comfortably supported by this short-term EMA suggests the uptrend is intact, while the Relative Strength Index (RSI) at 63.9 stays in bullish territory without yet signaling overbought conditions, hinting that buyers still retain control.
On the downside, immediate support is seen at the 20-period EMA at 95.48, followed by 95.00. Looking up, the pair aims to revisit the all-time high around 97.10.
(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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