USD/INR drifts higher on US Dollar strength
- The Indian Rupee loses traction in Wednesday’s Asian session.
- Renewed US Dollar demand, significant foreign fund outflows and higher crude oil prices undermine the INR.
- Investors are bracing for the FOMC Minutes, which are due later on Wednesday.
The Indian Rupee (INR) trades in negative territory on Wednesday. The US Dollar (USD) demand due to the maturity of positions in the non-deliverable forwards (NDF) market and a decline in most Asian peers weigh on the INR. Additionally, persistent outflows from local stocks and a recovery in crude oil prices contribute to the local currency’s downside.
On the other hand, potential USD selling intervention by the Reserve Bank of India (RBI) might help limit the INR’s losses. Investors will keep an eye on the FOMC Minutes, which will be released later on Wednesday. Also, the US Housing Starts and Building Permits will be published.
Indian Rupee remains fragile amid global economic dynamics
- India’s Gross Domestic Product (GDP) is projected to grow at 6.6% in the October-December quarter of 2024-25, down from 8.6% recorded in the same period of 2023-24, according to the Bank of Baroda on Tuesday.
- ICRA has projected the year-on-year (YoY) expansion of the GDP to rise to 6.4% in the third quarter of the current fiscal year (Q3FY25) from the seven-quarter low of 5.4% in Q2FY25.
- The NY Empire State Manufacturing Index climbed to 5.7 in February versus -12.6 in January, according to the Federal Reserve Bank of New York on Tuesday.
- San Francisco Fed President Mary Daly said on Tuesday that prospects of further rate cuts in 2025 remain uncertain despite an overall positive lean to US economic factors.
USD/INR’s constructive outlook prevails despite consolidation in the shorter term
The Indian Rupee softens on the day. Technically, the USD/INR pair keeps the bullish bias on the daily timeframe, with the price holding above the key 100-day Exponential Moving Average (EMA). Additionally, the upward momentum is further supported by the 14-day Relative Strength Index (RSI), which is above the midline around 56.0, indicating that further upside looks favorable.
The immediate resistance level emerges near the 87.00 psychological level. More green candlesticks and sustained trading above the mentioned level could draw in more bullish demand and push USD/INR back to an all-time high near 88.00, en route to 88.50.
In case of a further downswing, the first downside target to watch is 86.58, the low of February 17. Extended losses could see a drop to 86.35, the low of February 12, followed by 86.14, the low of January 27.
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.