The Indian Rupee (INR) edges lower on Wednesday as rising crude oil prices and a renewed US Dollar (USD) demand weigh on sentiment and drag the Indian currency lower. The terrorist attack in Kashmir, India, contributes to the INR's downside. At least 28 people were killed and many wounded on Tuesday when terrorists opened fire in a picturesque meadow near the resort town of Pahalgam in J&K, marking the deadliest attack since 2019.
Nonetheless, potential portfolio inflows into local shares might help limit the INR’s losses. The preliminary reading of India’s April HSBC Purchasing Managers’ Index (PMI) is due later on Wednesday. On the US docket, the flash S&P Global PMI report will be the highlight.
The Indian Rupee trades on a weaker note on the day. The longer-term downtrend of the USD/INR remains in play, with the price holding below the key 100-day Exponential Moving Average (EMA) on the daily chart. The downward momentum is supported by the 14-day Relative Strength Index (RSI), which stands below the midline near 37.25.
The 85.00-84.90 zone acts as a key support level for USD/INR, representing the psychological level and the lower limit of the descending trend channel. A breach of this level could drag the price lower to 84.53, the low of December 6, 2024. The next contention level to watch is 84.22, the low of November 25, 2024.
In the bullish case, the first upside barrier emerges at 85.85, the 100-day EMA. If momentum picks up, bulls could target 86.45, the upper boundary of the trend channel.
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.