USD/INR strengthens on India’s persistent FII fund outflows
- The Indian Rupee loses ground during Thursday’s Asian session.
- The weaker US Dollar and likely RBI intervention support the INR.
- Investors await the US Initial Jobless Claims and Fedspeak later on Thursday.
The Indian Rupee (INR) weakens on Thursday, snapping the three-day winning streak. Concerns on the US economy weigh on the US Dollar (USD) and provide some support to the local currency. Additionally, the likely intervention by the Reserve Bank of India (RBI) could help limit the INR’s losses.
On the other hand, the expectation that the RBI will cut its interest rates further is likely to exert downward pressure on the INR. India’s capital flows have remained negative for the fifth consecutive month. Persistent outflows by foreign institutional investors might contribute to the Indian Rupee's downside.
Investors will keep an eye on the US Initial Jobless Claims, which is due later on Thursday. The US Federal Reserve (Fed) officials are scheduled to speak on the same day, including Patrick Harker, Thomas Barkin and Christopher Waller. On Friday, the US February Nonfarm Payrolls (NFP) will be closely watched.
Indian Rupee softens amid sustained foreign institutional investors fund outflows
- RBI said on Wednesday it will infuse $21 billion in Rupee liquidity into the banking system in a bid to ease lending conditions and boost economic growth.
- India’s HSBC Composite PMI eased to 58.8 in February vs. 60.6 prior. Meanwhile, the Services PMI declined to 59 from 61.1 in the previous reading, beating the estimation of 57.3.
- "Job creation and charge inflation remained strong during February. Looking ahead, business sentiment remains broadly positive but did slightly slip last month to its lowest level since August 2024,” said Pranjul Bhandari, chief India economist at HSBC.
- Trump is considering exempting certain agricultural products from tariffs imposed on Canada and Mexico, a Bloomberg reporter said on X late Wednesday.
- The White House said on Wednesday that Trump is exempting automakers from newly imposed tariffs on Mexico and Canada for one month.
- Private sector employment in the US grew by 77K in February, compared to the previous reading of 186K (revised from 183K), according to the Automatic Data Processing (ADP) on Wednesday. This figure came in weaker than initial estimates of 140K.
USD/INR‘s longer-term bullishness to be tested by bearish closing marubozu in the shorter term
The Indian Rupee trades softer on the day. The positive view of the USD/INR pair remains in play, with the price holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. Nonetheless, further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) hovers around the midline near 50.0, suggesting neutral momentum in the near term.
The immediate resistance level for USD/INR emerges at 87.53, the high of February 28. Any follow-through buying above this level could set their sights on an all-time high near 88.00, en route to 88.50.
On the flip side, the first downside target to watch is 86.48, the low of February 21. Extended losses could see a drop to 86.14, the low of January 27, followed by 85.60, the low of January 6.
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.