USD/INR gains sharply at open on intensifying global trade jitters
- The Indian Rupee opens on a weak note against the US Dollar as the latter gains on risk-off market mood.
- Trump announces 30% tariffs on imports from the EU and Mexico.
- Investors await India-US CPI data for June.
The Indian Rupee (INR) opens lower against the US Dollar (USD) at the start of the week, sending the USD/INR pair higher to near 86.15. The pair was expected to open positively as the US Dollar (USD) extends its upside amid increased demand for safe-haven assets, following the announcement of higher import duties by United States (US) President Donald Trump on key trading partners, the European Union (EU) and Mexico.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near 98.00, the highest level seen in over two weeks.
Over the weekend, US President Trump rekindled global trade jitters after sending letters to the European Union (EU) and Mexico, dictating 30% tariffs that will be separate from sectoral levies and warning that any retaliatory measures will be met by further increases in import duties.
The announcement has led to a sharp decline in riskier assets. US equity futures have extended Friday’s losses, and risk-perceived currencies, such as the Indian Rupee, are underperforming, demonstrating a risk-aversion market mood.
Last week, US President Trump also announced 25% tariffs on Japan and 35% on Canada, along with 50% on imports of copper.
Daily digest market movers: Indian Rupee faces pressure ahead of Indian CPI data
- The Indian Rupee trades lower against the US Dollar and its European peers as investors turn risk-averse and uncertainty surrounds the trade deal between the US and India. US President Trump has stated a couple of times that Washington is close to securing a trade pact with India, but has not announced it officially.
- However, a report from Bloomberg over the weekend has also boosted confidence that the US and India are close to striking a trade agreement as it stated that the South-Asian nation doesn’t expect to receive a tariff demand letter.
- The Bloomberg report also stated that Trump will impose tariffs below 20% on India. Such a scenario will put the nation in a favorable position against economies, such as Vietnam, and Bangladesh that have been slapped higher tariffs. Given that India is a key exporter of textiles and apparels to the US along with Vietnam and Bangladesh, the imposition of lower tariffs on India will be a competitive advantage for Indian textile exporters.
- On the domestic front, investors await the Wholesale Price Index (WPI) Inflation and Consumer Price Index (CPI) data for June, which will be published during the day. The WPI Inflation is estimated to have grown at a faster pace of 0.52%, compared to a 0.39% growth seen in May.
- Investors will closely monitor the Indian CPI data, which is expected to have risen moderately by 2.5% on year against 2.82% growth seen in May. This would be the fifth straight month when the headline CPI will remain lower than the Reserve Bank of India’s (RBI) target of 3.7% for the current financial year, which it set in June’s policy meeting after front-loading interest rate cuts.
- In the US, investors will also focus on the CPI data for June, which will be released on Tuesday. The CPI report is expected to show that price pressures grew at a faster pace, a scenario that will discourage Federal Reserve (Fed) officials from cutting interest rates in the September meeting. According to the CME FedWatch tool, there is a 62.8% chance that the Fed will reduce interest rates in September.
Technical Analysis: USD/INR reclaims two-week high above 86.00
The USD/INR pair revisits an over two-week high of around 86.15 on Monday. The near-term outlook of the pair is bullish as the 20-day Exponential Moving Average (EMA) acts as a key support around 85.90
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting that the asset lacks momentum on either side.
Looking down, the May 27 low of 85.10 will act as key support for the major. On the upside, the June 24 low at 86.42 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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