USD/INR weakens amid escalating trade war tensions
- The Indian Rupee edges higher in Friday’s Asian session.
- Softer US Dollar and falling oil prices underpin the INR.
- The US March PPI and the advanced Michigan Consumer Sentiment data will be the highlights later on Friday.
The Indian Rupee (INR) strengthens on Friday. US President Donald Trump's move to temporarily lower tariffs on many countries provides some support to the local currency. Additionally, a decline in crude oil prices contributes to the INR’s upside as India is the world's third-largest oil consumer, and lower crude oil prices tend to have a positive impact on the Indian currency value.
However, reduced Federal Reserve (Fed) rate cut bets could strengthen the US Dollar (USD). Investors anticipate the US central bank will resume cutting interest rates in June and probably reduce its policy rate by a full percentage point by the end of the year.
India’s Industrial Output and Manufacturing Output data are due later on Friday. On the US docket, the Producer Price Index (PPI) for March and the advanced Michigan Consumer Sentiment will be published. Also, the Fed’s Alberto Musalem and John Williams are set to speak.
Indian Rupee rebounds amid a weaker US Dollar
- The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) unanimously voted to cut the policy Repo Rate by 25 basis points (bps) to 6.00% at its April meeting on Wednesday.
- US President Donald Trump let stand a 10% blanket levy on all imports announced last week and set a 90-day pause on additional US tariffs during which the White House will negotiate the higher tariffs.
- The US Consumer Price Index (CPI) inflation declined to 2.4% YoY in March from 2.8% in February, according to the US Bureau of Labor Statistics (BLS) on Thursday. This reading came in below the market consensus of 2.6%.
- The core CPI, which excludes volatile food and energy prices, increased 2.8% YoY in March versus 3.1% prior and came in below the estimation of 3.0%. On a monthly basis, the headline CPI declined 0.1%, while the core CPI rose 0.1%.
- Boston Fed President Susan Collins said Thursday that large trade tariffs now being pursued by the Trump administration will almost certainly drive inflation higher and depress growth in the near term. Collins sees steady monetary policy amid uncertainty.
- Chicago Fed President Austan Goolsbee highlighted high levels of uncertainty amid very aggressive trade tariffs and argued for a wait-and-see approach to monetary policy. Goolsbee added that if the economy gets back on track, rate cuts would still be possible.
USD/INR maintains a bullish bias, consolidation is likely in the near term
The Indian Rupee trades firmer on the day. The uptrend of the USD/INR pair remains intact, with the price being above the key 100-day Exponential Moving Average (EMA). Nonetheless, the 14-day Relative Strength Index (RSI) hovers around the midline. This suggests that further consolidation cannot be ruled out in the near term.
The first upside barrier for USD/INR emerges at 86.61, the high of April 10. Extended gains could see a rally to the 87.00 psychological level. A decisive break above the mentioned level could pave the way to 87.53, the high of February 28.
In the bearish event, the key support level for the pair is located in the 86.00-85.90 zone, representing the 100-day EMA and round figure. The next contention level to watch is 85.48, the low of March 24, followed by 85.00.
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.
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