USD/INR remains weak as concerns over Fed’s independence rise
- Indian Rupee strengthens in Tuesday’s Asian session.
- Positive trends in Indian equities and concerns over the Fed’s independence could boost the INR.
- Traders brace for the speeches from Fed’s Harker and Kashkari later on Tuesday.
The Indian Rupee (INR) edges higher on Tuesday after hitting a four-month high in the previous session. The rally in Indian equities could provide some support to the Indian currency. Additionally, anxiety over tariffs and criticism of US Federal Reserve (Fed) Chair Jerome Powell by US President Donald Trump could drag the US Dollar (USD) lower and benefit the INR.
On the other hand, markets will watch the Reserve Bank of India (RBI), which seems to be buying the USD to curb the INR rise. The rising expectation that the RBI will deliver an interest rate cut in the upcoming policy meeting could weigh on the local currency. The latest data showed that the Indian inflation rate declined to its lowest in over five years in March, well below the RBI's midpoint target of 4%.
The Fed’s Patrick Harker and Neel Kashkari are set to speak later on Tuesday. On Wednesday, India’s HSBC Purchasing Managers’ Index (PMI) for April and US S&P Global PMI reports will be in the spotlight.
Indian Rupee gains ground on US-India trade developments
- India’s Prime Minister Narendra Modi and US Vice President JD Vance welcomed “significant progress” in the ongoing negotiations for a mutually beneficial Bilateral Trade Deal (BTA).
- According to the US Trade Representative, they formally announced the finalisation of the Terms of Reference for the negotiations, laying down a roadmap for further discussions about shared economic priorities.
- US President Donald Trump slammed the Fed’s Powell for continuing to support a “wait and see” mode on the monetary policy until greater clarity over how the new tariff policy will shape the economic outlook.
- Trump warned in a Truth Social post that the US economy would slow unless Powell lowered interest rates immediately.
- White House economic adviser Kevin Hassett said on Friday that Trump and his team were continuing to study whether they could fire the Fed’s Powell.
USD/INR’s bearish outlook remains in place under the 100-day EMA
The Indian Rupee trades on a firmer note on the day. However, traders should note that the price remains capped below the key 100-day Exponential Moving Average (EMA) on the daily chart, suggesting the longer-term downtrend remains intact. The downward momentum is reinforced by the 14-day Relative Strength Index (RSI), which stands below the midline near 38.10.
The crucial support level for USD/INR is located at the 85.00-84.95 region, representing the psychological level and the lower limit of the descending trend channel. If bearish pressure kicks in, this could drag the pair towards 84.53, the low of December 6, 2024. The additional downside filter to watch is 84.22, the low of November 25, 2024.
On the other hand, the 100-day EMA at 85.85 acts as an immediate resistance level for the pair. If USD/INR holds above this level and buyers step in, the pair could make a run for 86.55, the upper boundary of the trend channel.
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.