USD/INR rises amid risk-off mood
- 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 vulnerable amid global economic outlook and macroeconomic headwinds
- India’s foreign exchange reserves fell to a near 11-month low of $623.98 billion as of January 17, according to the RBI on Friday.
- 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 economy FAQs
The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.
India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.
Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.
India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.
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