USD/INR gathers strength ahead of Indian PMI, WPI inflation data
- The Indian Rupee edges lower in Monday’s Asian session.
- Elevated USD bids, weaker in Asian peers, and a dovish tilt in RBI’s monetary policy could undermine the INR.
- Traders will take cues from the Indian PMI and WPI inflation data, which are due later on Monday.
The Indian Rupee (INR) weakens on Monday. Heightened US Dollar (USD) demand in the non-deliverable forwards market and a weaker Chinese Yuan weigh on the local currency. Furthermore, the growing expectations of a dovish tilt in monetary policy following the appointment of a new Reserve Bank of India (RBI) governor could contribute to the INR’s downside.
However, the RBI’s routine intervention in the market by selling USD might help limit the INR’s losses. Traders will keep an eye on the preliminary HSBC India Purchasing Managers Index (PMI) for December, along with the WPI Inflation data, which are due later on Monday. The US Federal Reserve (Fed) will deliver its policy decision on Wednesday. Investors will monitor its dot plot to assess if the median interest rate projections show a hawkish shift in the Fed's outlook
Indian Rupee remains vulnerable, pressured by a rally in US Dollar
- The Indian Rupee depreciated by 1.5% against the US Dollar during the calendar year but outperformed most Asian currencies due to interventions by the Reserve Bank of India (RBI).
- India’s foreign exchange reserves declined by $3.2 billion to a more than five-month low of $654.86 billion as of December 6, the RBI showed on Friday.
- "The change in leadership at the RBI may lead to an initial market assumption that a rate cut in the February policy meeting is more likely," said VRC Reddy, treasury head at Karur Vysya Bank.
- According to the CME FedWatch tool, markets are now almost fully pricing a 25 basis points (bps) cut at the Fed's December meeting, compared with about a 78% chance a week ago.
USD/INR’s positive picture prevails in the longer term
The Indian Rupee trades on a softer note on the day. The USD/INR pair keeps the bullish vibe on the daily chart as the pair is well supported above the key 100-day Exponential Moving Average (EMA). The upward momentum is supported by the 14-day Relative Strength Index (RSI), which is located above the midline near 66.35, suggesting that the path of least resistance is to the upside.
The ascending trend channel and the psychological level of 85.00 act as crucial resistance levels for USD/INR. A break above these levels could spur a rally to 85.50.
On the flip side, the initial support level for the pair is located at 84.75, the lower boundary of the trend channel. Extended losses below the mentioned level could drag USD/INR to the next bearish targets at 84.22, the low of November 25, followed by 84.12, the 100-day EMA.
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.