- The Indian Rupee loses traction during the Asian session on Monday.
- Stronger USD, foreign capital outflows and concerns over India’s economic slowdown weigh on INR.
- The Fed’s rate decision will be in focus on Friday.
The Indian Rupee (INR) eases on Monday after posting its biggest weekly gain in nearly 17 months in the previous session. The weakening of the US Dollar (USD) after US President Donald Trump refrained from immediately imposing tariffs on key trading partners supported the local currency. Additionally, the Reserve Bank of India’s (RBI) intervention in the forex market and lower crude oil prices could help limit INR losses.
However, renewed demand for the dollar from importers, outflows of Foreign Portfolio Investors (FPIs) from the Indian stock market and concerns over an economic slowdown in India could put some selling pressure on the INR. All eyes will be on the US Federal Reserve’s (Fed) interest rate decision on Wednesday, with no rate changes expected. Traders will take cues from the press conference about the outlook for US interest rates this year.
Indian Rupee Looks Fragile Amid Global Economic Outlook and Macroeconomic Headwinds
- HSBC India’s preliminary manufacturing Purchasing Managers’ Index (PMI) reading improved to 58.0 in January from 56.4 in December.
- India’s services PMI fell to 56.8 in January from 59.3 previously. The composite PMI fell to 57.9 in January from 59.2 previously.
- “India’s manufacturing sector started the year strongly, with production and new orders recovering from a relatively weak fiscal third quarter. The increase in new export orders was especially notable, and the decline in cost inflation of inputs is also good news for manufacturers,” said Pranjul Bhandari, chief India economist at HSBC.
- The US S&P Global Composite PMI index fell 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 fell to 52.8 in January from 56.8 previously, below the market consensus of 56.5.
- US existing home sales rose 2.2% month-over-month in December, from 4.15 million to 4.24 million.
USD/INR paints a positive long-term picture
The Indian Rupee is trading in negative territory on the day. The constructive view on the USD/INR pair remains intact as the pair has traded within the descending triangle pattern and is well supported above the 100-day EMA on the daily chart. Furthermore, the 14-day Relative Strength Index (RSI) is trading above the midline near 58.35, suggesting that the uptrend is more likely to resume rather than reverse.
The crucial upside barrier for USD/INR emerges at an all-time high of 86.69. A bullish break above this level could see a rally towards the psychological mark of 87.00.
On the other hand, the initial support level is observed at 86.14, the low of January 24. Any additional selling below the mentioned level could see a drop towards the next downside targets at 85.85, the January 10 low, en route towards 85.65, the January 7 low.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the currencies most sensitive to external factors. The price of crude oil (the country relies heavily on imported oil), the value of the US Dollar (most trade is done in US dollars), and the level of foreign investment are all influential factors. The Reserve Bank of India’s (RBI) direct intervention in the foreign exchange markets to keep the exchange rate stable as well as the level of interest rates set by the RBI are other important factors influencing the Rupee. .
The Reserve Bank of India (RBI) actively intervenes in foreign exchange markets to maintain a stable exchange rate and help facilitate trade. Furthermore, the RBI tries to keep the inflation rate at its target of 4% by adjusting interest rates. Higher interest rates tend to strengthen the Rupee. This is due to the role of the “carry trade”, in which investors borrow in countries with lower interest rates to park their money in countries that offer relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, economic growth rate (GDP), trade balance and foreign investment inflows. A higher growth rate can lead to more investment abroad, increasing demand for the Rupee. A less negative trade balance will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates minus inflation) are also positive for the Rupee. A risk environment can lead to higher inflows of foreign direct and indirect investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly if it is comparatively higher than other countries, is generally negative for the currency as it reflects a devaluation through excess supply. Inflation also increases the cost of exports, leading to more rupees being sold to buy foreign imports, which is negative for the Indian Rupee. At the same time, higher inflation usually leads the Reserve Bank of India (RBI) to raise interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect applies to lower inflation.
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.
