- The USD/INR rises slightly on Thursday after a four -day loss streak.
- The US tariff threats return while President Trump threatens to send letters to commercial partners outlineing the terms of trade.
- The increase in the probabilities of a Fed rate cut in September could weigh on the USD and help limit the additional use of the USD/INR.
The Indian rupee (INR) recovers some of the initial losses against the US dollar (USD) before Thursday’s American session while the markets digest the latest publication of the US Price Price Index (IPP) of the USA for May. Even so, the USD/INR torque rises in the day, quoting above 85.50 at the time of writing, after four consecutive days of losses,
The IPP, which was generally softer than expected, helps to reaffirm the expectations that the Federal Reserve (FED) could cut the interest rate in September.
The general IPP figure for May was 2.6% (year -on -year), in line with expectations and slightly higher than the 2.5% reviewed reading in April. Meanwhile, the underlying IPP figure, which excludes food and energy prices, stood at 3%, below the 3.1% prognosis and lowering 3.2% in April.
After a softer report of the US Consumer Price Index (CPI) on Wednesday, which showed signs of decreased inflation in the US, the expectations of a Fed interest rate cut in September in September have increased. Since the Fed has maintained a restrictive monetary policy position in relation to other central banks throughout the year, the lower interest rates perspectives make the USD less attractive, limiting the advance of the USD/INR.
For emerging market currencies, such as Indian rupee, this presents an opportunity to capitalize on the highest performance differentials found in developing nations.
An additional catalyst for the USD/INR torque is the reemergence of tariff threats, which charged prominence after US President Donald Trump declared Wednesday that letters would soon be sent to their global peers.
Reuters reported the comments, which included statements such as: “We are advancing in terms of agreements,” and “we are dealing with several countries and everyone wants to make a deal with us.” This was followed by his statement that “at some point, we will simply send letters … saying, ‘this is the deal. You can accept or leave it.'”
The combination of the decrease in inflation in the US and commercial uncertainty due to Trump tariffs is considered an additional threat to the USD, supporting the use of alternative currencies. However, despite the generalized weakness of the USD, the USD/INR has failed to gain traction below the psychological level of 85.00 and recovers slightly on Thursday.
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. The high growth of India has attracted a lot of foreign investment. This includes foreign direct investment (FDI) in physical projects and indirect foreign investment (IIF) of foreign funds in Indian financial markets. The higher the investment level, the greater the demand for rupees (INR). Fluctuations in the demand for dollars by Indian importers also affect INR.
India has to import a lot of its oil and gasoline so that the price of oil can have a direct impact on the rupee. Petroleum is mainly marketed in US dollars (USD) in international markets, so if the price of oil increases, aggregate demand for US dollars increases and Indian importers have to sell more rupees to meet that demand, which depreciates the rupee.
Inflation has a complex effect on rupee. Ultimately, it indicates an increase in the money supply that reduces the general value of the rupee. However, if it exceeds the 4% objective of the Bank of the India Reserve (RBI), the RBI will increase interest rates to reduce it by reducing credit. The highest interest rates, especially real rates (the difference between interest rates and inflation) strengthen rupee. They make India a more profitable place for international investors to deposit their money. A fall in inflation can support rupee. At the same time, lower interest rates can have a depreciative effect on rupee.
India has had a commercial deficit during most of its recent history, indicating that its imports exceed its exports. Since most of the international trade is done in US dollars, there are moments (due to seasonal demand or excess orders) in which the high volume of imports generates a significant demand for US dollars. During these periods, rupee can weaken since a lot is sold to meet the demand for dollars. When markets experience greater volatility, the demand for US dollars can also be shot, with an equally negative effect on rupee.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
