Fxstreet
Sep 24, 2024 1:52 AM
The Indian Rupee (INR) consolidated its gains on Monday after reaching its highest level since mid-July in the previous session. The local currency might be bolstered by the Federal Reserve's (Fed) recent rate cut and strong portfolio inflows into Indian markets. Additionally, the decline in crude oil prices could underpin the INR as India is the third-largest oil consumer after the United States (US) and China.
Nonetheless, the US Dollar (USD) demand from local oil companies might help limit the pair’s losses. Investors await the US Consumer Confidence for September for fresh impetus. Also, Fed Governor Michelle Bowman is scheduled to speak later on Tuesday.
The Indian Rupee trades flat on the day. The USD/INR pair keeps the bearish vibe on the daily timeframe as it holds below the key 100-day Exponential Moving Average (EMA). The path of least resistance level is to the downside as the 14-day Relative Strength Index (RSI) stands in the bearish zone near 33.70.
The first upside barrier for USD/INR emerges near the 100-day EMA at 83.68. Any follow-through buying above this level could see a rally to the key resistance level at the 84.00 psychological mark.
On the flip side, the initial support level for the pair is located at 83.30, the low of June 19. The additional downside filter to watch is the 83.00 round mark.
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.