USD/INR refreshes four-month high as Indian Rupee faces multiple headwinds
- Indian Rupee extends its downside against the US Dollar as the former weakens due to FIIs selling in Indian markets.
- The US-EU tariff deal has strengthened the US Dollar.
- Investors await the Fed policy and a string of US economic data.
The Indian Rupee (INR) posts a fresh four-month high against the US Dollar (USD) at open on Tuesday. The USD/INR pair slides to near 87.08 as the Indian Rupee continues to face headwinds from the outflow of foreign funds by institutional investors and a decent recovery in the Oil price.
Theoretically, the outflow of a significant amount of foreign funds by portfolio investors diminishes the appeal of currencies from developing economies, such as the Indian Rupee.
On Monday, Foreign Institutional Investors (FIIs) sold equity shares worth Rs. 6,082.47 crores in Indian markets. They have been net sellers in cash equity markets in the last six trading sessions. So far, FIIs have sold Rs. 36,591.13 crores worth of shares in the cash market.
The impact of relentless FIIs selling has also weighed heavily on Indian indices. Nifty50 is down more than 4% from its recent spot levels of 25,669.35. Meanwhile, signs of muted growth in quarterly earnings from India Inc. have also weighed on Indian bourses.
Meanwhile, a recovery move in the Oil price due to the confirmation of a tariff deal between the United States (US) and the European Union (EU) has also weighed on the Indian Rupee. The appeal of currencies from those nations that depend largely on Oil imports to fulfil their energy needs gets diminished if the Oil price rises.
Daily digest market movers: Indian Rupee continues to underperform against US Dollar
- Sheer strength in the US Dollar after the US-EU tariff deal confirmation has also lifted the USD/INR pair. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its upside to near 98.70 at the time of writing. The USD Index inches closer to its monthly high near 99.00.
- Market experts have argued that the US-EU trade agreement favors Washington as it will receive 15% tariffs on imports from Brussels. Investors had priced in a zero-for-zero tariff deal between economies from both sides of the Atlantic. Additionally, the EU has promised to invest $600 billion in the US, in addition to existing expenditures.
- "While the U.S. dollar’s strength may reflect the perception that the new US-EU deal is lopsided in favour of the US, the US Dollar’s strength may also reflect a feeling that the US is re-engaging with the EU and with its major allies, analysts at Macquarie group said, Reuters reported.
- Meanwhile, investors await an array of US economic data, such as the Personal Consumption Expenditure Price Index (PCE) and JOLTS Job Openings data for June, flash Q2 Gross Domestic Product (GDP), and the ISM Manufacturing PMI data for July, this week, and the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.
- In Tuesday’s session, the US JOLTS Job Openings report is expected to show that companies posted 7.55 million fresh jobs in June, slightly lower than 7.77 million in May.
- On Wednesday, the Fed is certain to leave interest rates steady in the range of 4.25%-4.50%. This would be the fifth straight decision by the Fed to hold borrowing rates at their current levels. Investors will closely monitor commentary from Fed Chair Jerome Powell for fresh cues on the monetary policy outlook for the remainder of the year.
Technical Analysis: USD/INR gains sharply to near 87.00
The USD/INR pair jumps to near 87.08 at open on Tuesday, the highest level seen in over four months. The pair trades firmly as the 20-day Exponential Moving Average (EMA) slopes higher to near 86.35, indicating a strong uptrend.
The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting strong bullish momentum
Looking down, the 20-day EMA will act as key support for the major. On the upside, the March 11 high at 87.56 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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