USD/INR strengthens amid the US Dollar recovery
- The Indian Rupee loses traction during Monday’s Asian session.
- The stronger USD, foreign outflows and the concerns about the Indian economic slowdown weigh on the INR.
- The Fed rate decision will take center stage on Friday.
The Indian Rupee (INR) edges lower on Monday after posting its biggest weekly gain in nearly 17 months in the previous session. The weakening in the US Dollar (USD) after US President Donald Trump refrained from immediately imposing tariffs on key trading partners supporting the local currency. Furthermore, the Reserve Bank of India’s (RBI) intervention in the foreign exchange market and lower crude oil prices could help limit the INR's losses.
Nonetheless, the renewed Greenback demand from importers, Foreign Portfolio Investors (FPIs) outflows from the Indian stock market and concerns about an economic slowdown in India could exert some selling pressure on the INR. All eyes will be on the US Federal Reserve (Fed) interest rate decision on Wednesday, with no change in rate expected. Traders will take a cue from the Press Conference about the US interest rate outlook this year.
Indian Rupee seems fragile amid global economic outlook and macroeconomic headwinds
- The preliminary reading of HSBC India Manufacturing Purchasing Managers Index (PMI) improved to 58.0 in January from 56.4 in December.
- The Indian Services PMI eased to 56.8 in January versus 59.3 prior. The Composite PMI declined to 57.9 in January versus 59.2 prior.
- “India’s manufacturing sector started the year strong, with output and new orders bouncing back from a relatively weak third fiscal quarter. The rise in new export orders was especially noticeable, and the easing of input cost inflation is also good news for manufacturers," said Pranjul Bhandari, chief India economist at HSBC.
- The US S&P Global Composite PMI eased to 52.4 in January from 55.4 in December.
- The US S&P Global Manufacturing PMI rose to 50.1 in January from the previous reading of 49.4, stronger than the 49.6 expected. The Services PMI declined to 52.8 in January versus 56.8 prior, below the market consensus of 56.5.
- The US Existing Home Sales rose by 2.2% MoM in December, from 4.15 million to 4.24 million.
USD/INR paints a positive picture in the longer term
The Indian Rupee trades in negative territory on the day. The constructive view of the USD/INR pair remains intact as the pair has traded within the descending triangle pattern and is well-supported above the key 100-day Exponential Moving Average (EMA) on the daily chart. Additionally, the 14-day Relative Strength Index (RSI) stands above the midline near 58.35, suggesting that the uptrend is more likely to resume than to reverse.
The crucial upside barrier for USD/INR emerges at an all-time high of 86.69. A bullish breakout above this level could see a rally to the 87.00 psychological mark.
On the flip side, the initial support level is seen at 86.14, the low of January 24. Any follow-through selling below the mentioned level could see a drop to the next bearish targets at 85.85, the low of January 10, en route to 85.65, the low of January 7.
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.