USD/INR opens strongly as Indian Rupee is hit hard by global Oil supply risks
- The Indian Rupee slumps to near 86.85 at open against the US Dollar as rising crude prices have battered the former.
- Iran threatens to close the Strait of Hormuz following the US attack on Tehran’s nuclear facilities.
- Fed’s Waller supports reducing interest rates in the July policy meeting.
The Indian Rupee (INR) opens on a bearish note against the US Dollar (USD) and jumps to near 86.85 at the start of the week. Investors were bracing for a significant negative opening of the USD/INR pair, following the risk-off market sentiment and a sharp increase in the Oil price due to the United States (US) joining Israel’s assault on Iran.
Currencies that depend significantly on the import of Oil get impacted severely by rising energy prices.
Over the weekend, the US struck three Iranian nuclear facilities: Fordow, Natanz, and Esfahan, aiming to restrict Tehran from fulfilling its ambition of building nuclear warheads. According to comments from the White House came on Thursday, Washington was expected to take decision on whether to strike Iran on not was expected to be taken within two weeks.
The unexpected direct involvement of the US in Middle East tensions has forced investors to shift to the safe-haven fleet, improving the demand for the US Dollar as a safe-haven asset. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, revisits the 10-day high slightly above 99.00.
In retaliation, Iran is preparing to close the Strait of Hormuz, through which almost a quarter of the global Oil is supplied.
The decision to close the Oil gateway, which Iran shares with Oman and the United Arab Emirates (UAE), has been approved by Tehran’s parliament and has been forwarded to the Supreme National Security Council for final approval, Iran’s Press TV reported.
Daily digest market movers: Indian Rupee underperforms US Dollar amid risk-off mood
- The Indian Rupee resumes its downside journey against the US Dollar after a short-lived pullback move on Friday to near 86.55. Rising crude prices due to flaring Middle East tensions after the direct involvement of the US in the Israel-Iran war have pushed the Indian Rupee on the backfoot again.
- Market experts are bracing for a significant upside in the USD/INR, citing that higher energy prices would accelerate India’s current account deficit, which will weaken the Indian Rupee further.
- According to analysts at Bernstein, the Indian Rupee could depreciate toward Rs. 88 against the US Dollar if Israel-Iran tensions persist. The private wealth management firm estimated that a sustained $10 rise in crude prices over a quarter could add 0.11% of Gross Domestic Product (GDP) to India’s current account deficit.
- Meanwhile, Goldman Sachs has projected that Brent crude could briefly peak at $110 per barrel if oil flows through the critical waterway were halved for a month and remained down by 10% for the following 11 months, Reuters reported. Following the US attack on Iran, Brent Crude Oil has jumped to around $78.80, the highest level seen in five months.
- On the domestic front, the Reserve Bank of India (RBI) minutes released on Friday showed that the Indian central bank front-loaded interest rate cuts to send a clear message to economic agents that it intends to support consumption and investment through lower borrowing costs. In the policy meeting, the RBI slashed its Repo Rate unexpectedly by 50 basis points (bps) to 5.5%.
- In the US region, traders are expected to raise bets supporting the Federal Reserve (Fed) to reduce interest rates in the July policy meeting as officials have split over the monetary policy outlook after holding it steady in last week’s meeting.
- On Friday, Fed Governor Christopher Waller argued in favor of cutting interest rates in July, citing concerns over the labor market. "The Fed should not wait for the job market to crash in order to cut rates," Waller said in an interview with CNBC Squawk Box on Friday. He also stated that the impact of tariffs imposed by US President Donald Trump will be as big on inflation. "I do not think inflation impact from tariffs will be big, trend is looking good," Waller said.
- Contrary to Fed’s Waller, Richmond Federal Reserve President Thomas Barkin said that there is no rush for interest rate cuts amid uncertainty over how much new trade policies will prompt inflation. “I am comfortable with where we are and nothing is burning on either side [inflation and labor market] such that it suggests there’s a rush to act,” Barkin said.
Technical Analysis: USD/INR aims to revisit two-month high around 86.95
The Indian Rupee rises to near 86.85 against the US Dollar on Monday and aims to revisit an over two-month high of 86.93 posted on Thursday. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 86.10.
The 14-day Relative Strength Index (RSI) holds above 60.00, suggesting that the bullish momentum is intact.
Looking down, the 20-day EMA is a key support level for the major. On the upside, the April 11 high of 87.14 will be a critical hurdle for the pair.
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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