USD/INR opens higher on foreign funds outflow, delay in US-India trade deal
- The Indian Rupee declines against the US Dollar as the former weakens due to multiple headwinds.
- Consistent outflow of foreign funds from Indian markets and a delay in the US-India deal have weighed on the Indian Rupee.
- The Fed is almost certain to leave interest rates steady in the monetary policy meeting next week.
The Indian Rupee (INR) opens on a negative note against the US Dollar (USD) on Tuesday. The USD/INR pair extends its winning streak for the fourth trading day, trades higher close to a four-week high around 86.50.
The pair has remained on the front foot as the Indian currency continues to underperform, following the continuous outflow of funds by Foreign Institutional Investors (FIIs) this month. So far, FIIs have sold Rs. 18,636.98 crores worth of equities in July.
Uncertainty surrounding trade discussions between the United States (US) and India and ambiguity over the global outlook after the August 1 tariff deadline have forced FIIs to pare investments from Indian markets.
A report from NDTV showed on Monday that India’s Chief Trade Negotiator Rajesh Agrawal-led team has returned from Washington after the fifth round of trade talks, with the deal remaining in a cliffhanger. The report stated that an interim Free Trade Agreement (FTA) would be signed in the last quarter of the year, suggesting that exports from India to the US will continue to face sectoral tariffs. The report also showed that a team of officials from Washington will visit Indian in mid-August to extend trade discussions.
Daily digest market movers: Indian Rupee underperforms US Dollar
- The Indian Rupee weakens against the US Dollar, while the latter flattens in Tuesday’s Asian session after correcting the previous day. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat slightly below 98.00, after retracing from the four-week high near 99.00.
- The US Dollar is expected to stay on sidelines with investors awaiting headlines related to trade discussions by the US with its trading partners.
- So far, the US has announced trade deals with the United Kingdom (UK), Vietnam, and Indonesia, and a limited pact with China. Washington has announced tariffs on 22 nations, notably Japan, Vietnam, Canada, Mexico, and the European Union (EU).
- Meanwhile, trade tensions between the US and the EU have escalated as the 27-nation bloc vowed to retaliate after President Donald Trump demanded a higher baseline tariff and showed reluctancy on wavering the 25% automobile levy.
- The comments from US Treasury Secretary Scott Bessent in an interview with CNBC on Monday have signaled that there won’t be many deals signed ahead of the August 1 tariff deadline as Washington is more concerned about the “quality of deal” not timing. “The important thing here is the quality of the deal, not the timing of the deals,” Bessent said.
- Bessent’s comments also signaled that August 1 is “hard deadline” and Washington could roll back “April 2 level” tariff rates on nations that have failed in reaching a deal.
- On the domestic front, traders are increasingly confident that the Federal Reserve (Fed) will keep interest rates steady in the range of 4.25%-4.50% in the policy meeting next week. According to the CME FedWatch tool, the probability for the Fed to reduce borrowing rates in the September policy meeting has also reduced to 58.3% from 69.6% seen a month ago. Traders pare Fed dovish bets after the latest Consumer Price Index (CPI) report showed that prices of products that are the largest imports in the US have increased.
- This week, investors will focus on the preliminary private Purchasing Managers’ Index (PMI) data for July from both India and the US, which will be published on Thursday.
Technical Analysis: USD/INR stays above 20-day EMA
USD/INR trades higher around 86.40 in the opening session on Tuesday. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 86.07.
The 14-day Relative Strength Index (RSI) jumps to near 60.00. A fresh bullish momentum would emerge if the RSI breaks above that level.
Looking down, the 50-day EMA near 85.85 will act as key support for the major. On the upside, the June 23 high near 87.00 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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