USD/INR opens marginally higher on India Rupee’s continued underperformance
- The Indian Rupee ticks down against the US Dollar amid continued US-India trade tensions.
- Moody’s warned that US-India trade issues could dampen New Delhi’s manufacturing ambitions.
- Investors shift their focus to the US-India CPI data for July.
The Indian Rupee (INR) opens slightly negative around 87.70 against the US Dollar (USD) at the start of the week. The USD/INR ticks up as the Indian Rupee continues to underperform due to United States (US)-India trade tensions.
The USD/INR pair has been ending positively for the last five weeks as the imposition of 50% tariffs on imports from India into the US has raised concerns over New Delhi’s manufacturing ambition plans.
Analysts at Moody’s said in a report that the widening tariff gap between India and other Asia-Pacific countries would impact “India’s ambitions to develop its manufacturing sector”, particularly in higher value-added sectors such as electronics, and may even “reverse some of the gains made in recent years in attracting related investments”, Reuters reported.
Trade tensions between the US and India accelerated last week after the latter maintained its stance to continue buying Oil from Russia, despite Washington stretching tariffs on imports from New Delhi to 50%, (cumulative of 25% reciprocal levies and 25% penalty for buying Russian Oil).
On the foreign investment front, Foreign Institutional Investors (FIIs) bought Rs. 1,932.81 crores worth of equity shares on Friday. This was the first trading day of August, when FIIs remained net buyers in the Indian stock market. FIIs’ relentless sell-off in July and August has led to a sharp decline in Indian capital markets. India’s benchmark index Nifty50 has closed negatively in six straight weeks. The 50-stock basket is down almost 5% from its recent highs of 25,670 in the spot market.
Daily digest market movers: Investors await US-India CPI data for July
- The Indian Rupee underperforms the US Dollar even as the latter is down against its other major peers due to firm expectations that the Federal Reserve (Fed) will reduce interest rates in the September policy meeting.
- According to the CME FedWatch tool, there is an 88% chance that the Fed will cut the Federal Funds Rates by 25 basis points (bps) to the range between 4.00% and 4.25%.
- Fed’s interest rate cut bets have strengthened as some Federal Open Market Committee (FOMC) members are arguing in favor of monetary policy adjustments amid growing labor market concerns.
- Over the weekend, Fed Governor Michelle Bowman stated that the recent labor market data has strengthened her confidence in her forecast that there will be three interest rate cuts this year.
- “With economic growth slowing this year and signs of a less dynamic labor market becoming clear, I see it as appropriate to begin gradually moving our moderately restrictive policy stance toward a neutral setting,” Bowman said in her prepared remarks at the Kansas Bankers Association.
- Going forward, investors will focus on the US and India’s Consumer Price Index (CPI) data for July, which are scheduled to be released on Tuesday. Economists expect the US inflation to have grown at a faster pace, while price pressures in the Asian economy are estimated to have slowed down.
- The US CPI report is expected to show that the headline and core inflation accelerated to 2.8% and 3.0% on year, respectively. Investors will closely track prices of goods that are largely imported in the US to gauge the impact of tariffs.
- In India, the CPI is seen at 1.76% on year, down from 2.1% in June. This would be the lowest figure seen in eight years. Cooling price pressures way below the Reserve Bank of India’s (RBI) inflation target of 4% could pave the way for more interest rate cuts in the remainder of the year.
Technical Analysis: USD/INR stays above 20-day EMA
The USD/INR pair edges higher to near 87.70 at open on Monday. The near-term trend of the pair is bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 87.17.
The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting a strong bullish momentum
Looking down, the 20-day EMA will act as key support for the major. On the upside, Tuesday’s high around 88.25 will be a critical hurdle for the pair.
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.