USD/INR tumbles at open as Oil price react negatively to Israel-Iran ceasefire
- Indian Rupee surges 0.75% to near 86.10 against the US Dollar as Oil price dives following Israel-Iran truce.
- A significant improvement in investors' risk appetite has battered the US Dollar badly.
- Fed’s Bowman argued in favor of reducing interest rates in the July policy meeting.
The Indian Rupee (INR) opens strongly at 86.10 against the US Dollar (USD) on Tuesday. The USD/INR pair slumps as the bleeding Oil price follows the announcement of the Israel-Iran ceasefire by United States (US) President Donald Trump through a post on Truth.Social has strengthened the Indian currency.
The Oil price on the New York Mercantile Exchange (NYMEX) has dived over 15% from its high of $76.74. This scenario is favorable for currencies of nations that have lower Oil reserves and depend significantly on imports to address their needs, such as the Indian Rupee.
Inflation in the Indian economy cools down, and the current account deficit diminishes if Oil prices remain lower.
It has been fully agreed by and between Israel and Iran that there will be a Complete and Total CEASEFIRE (in approximately 6 hours from now, when Israel and Iran have wound down and completed their in-progress, final missions!), for 12 hours, at which point the War will be considered, ENDED,” Trump wrote.
Following the announcement of Israel-Iran ceasefire by US President Trump, a senior Iranian official has also confirmed that Tehran agreed to Qatar mediated, US-proposed ceasefire with Israel, Reuters reported.
Lower Oil prices and a sharp increase in the risk appetite of investors, following the Iran-Israel ceasefire announcement, have fuelled a strong recovery in the Indian equity market, sending Nifty50 208 points higher at open to near 25,180. Meanwhile, Sensex30 has rallied 0.85% to near 82,600. Both indices saw a sharp sell-off in the opening session on Monday after Iran threatened to close the Strait of Hormuz through which almost a quarter of the global Oil is supplied. However, they recovered sharply due to the strength in the domestic economy. On Monday, Foreign Institutional Investors (FIIs) bought Rs. 5,591.77 worth of Indian equities.
Daily digest market movers: Indian Rupee strengthens against US Dollar as safe-haven demand falls
- The sharp downside move in the USD/INR pair is also driven by weakness in the US Dollar due to multiple headwinds: improving risk profile and a shift in Federal Reserve (Fed) officials’ stance on the monetary policy outlook.
- A sharp increase in the risk appetite of investors, following the Israel-Iran truce, has diminished the appeal of the US Dollar, which gained sharply on Monday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, tumbles to near 98.10 during Asian trading hours on Tuesday from a fresh two-week high around 99.40 posted the previous day.
- On the domestic front, recent commentaries from a few Fed officials have signaled growing concerns over the labor market and increasing confidence that the impact of tariffs imposed by President Donald Trump on inflation will be limited. A scenario that bolsters hopes for an interest rate cut in the near term.
- On Monday, Fed Governor Michelle Bowman showed openness to reducing interest rates in the July meeting, citing downside risks to employment and confidence that the trade policy is only likely to have ‘minimal impacts’ on inflation. “It is time to consider adjusting the policy rate,” Bowman said and added, “We should put more weight on downside risks to the job market going forward.”
- Last week, Fed Governor Christopher Waller also 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.
Technical Analysis: USD/INR dives to near 20-day EMA
The USD/INR pair tumbled at open to near the 20-day Exponential Moving Average (EMA) around 86.10, suggesting that the near-term trend has become uncertain.
The 14-day Relative Strength Index (RSI) slides vertically to near 50.00 after remaining above 60.00 in the past few trading days, indicating a strong bearish reversal.
Looking down, the June 12 high at 85.70 will act as key support for the major. On the upside, the June 19 high of 86.93 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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