USD/INR extends losses, downside seems limited due to risk aversion
- Indian Rupee may face challenges following the risk aversion sentiment over a potential slowdown in the US economy.
- Traders expect potential RBI interventions to prevent the INR from falling below the 84.00 mark.
- The US Dollar remains stable as Friday’s US labor data reduce the odds of an aggressive Fed rate cut in September.
The Indian Rupee (INR) extends its gains for the second successive session against the US Dollar (USD) on Monday. However, the USD/INR pair might experience appreciation in the near term due to a broader decline in Asian equities and currencies, driven by increasing concerns over a potential slowdown in the US economy.
Last week, the Reserve Bank of India (RBI) likely intervened multiple times to support the Indian Rupee. Traders are likely watching for potential RBI interventions to prevent the INR from falling below the 84.00 mark. Additionally, rising Oil prices could exert pressure on the INR, given that India is the world’s third-largest Oil consumer and importer.
The downside of the USD/INR pair could be restrained as the US Dollar receives support as Friday’s US labor data reduce the likelihood of an aggressive interest rate cut by the Federal Reserve (Fed) at its September meeting. The US Nonfarm Payrolls (NFP) added 142,000 jobs in August, below the forecast of 160,000 but an improvement from July’s downwardly revised figure of 89,000.
According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has slightly decreased to 29.0%, down from 30.0% a week ago.
Daily Digest Market Movers: Indian Rupee appreciates due to less likelihood of aggressive Fed rate cuts
- Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee remarked on Friday that Fed officials are starting to align with the broader market's sentiment that a policy rate adjustment by the US central bank is imminent, according to CNBC. FXStreet’s FedTracker, which uses a custom AI model to evaluate Fed officials' speeches on a dovish-to-hawkish scale from 0 to 10, rated Goolsbee's comments as dovish, assigning them a score of 3.2.
- India's FX Reserves reached a record high of $683.99 billion as of August 30, up from $681.69 billion previously. This surge is largely due to a substantial influx of foreign exchange into the Indian economy, spurred by robust economic growth and the long-anticipated inclusion of Indian assets in JPMorgan's major emerging market debt index, which has enhanced foreign investment.
- ADP Employment Change showed on Thursday that private-sector employment increased by 99,000 in August, following July’s increase of 111,000 and below the estimate of 145,000. Meanwhile, the weekly US Initial Jobless Claims rose to 227,000 for the week ending August 30, compared to the previous reading of 232,000 and below the initial consensus of 230,000.
- “The Composite PMI for India continued to show strong growth in August, driven by accelerated business activity in the service sector, which experienced its fastest expansion since March. This growth was largely fuelled by an increase in new orders, particularly domestic orders,” said Pranjul Bhandari, Chief India Economist at HSBC.
- The World Bank has raised India's growth forecast to 7% for the current financial year (FY25), up from an earlier projection of 6.6%.
- US JOLTS Job Openings dropped to 7.673 million in July, down from 7.910 million in June, marking the lowest level since January 2021 and falling short of market expectations of 8.10 million.
Technical Analysis: USD/INR remains below 84.00, tests support at nine-day EMA
The Indian Rupee trades around 84.00 on Monday. Analysis of the daily chart shows that the USD/INR pair consolidates within the symmetrical triangle pattern, indicating a period of consolidation and a decrease in volatility. However, the 14-day Relative Strength Index (RSI) remains just above the 50 level, suggesting that the overall trend is still bullish.
On the downside, the nine-day Exponential Moving Average (EMA) at 83.92 level acts as immediate support, followed by the lower boundary of the symmetrical triangle around the level of 83.90. A break below this level could reinforce the bearish bias and put downward pressure on the USD/INR pair to revisit its six-week low at 83.72 level. Consequently, a decline below the 50 level on the RSI could indicate a shift toward a bearish bias.
In terms of resistance, the USD/INR pair tests the upper boundary of the symmetrical triangle at the 84.00 level. A breakthrough above this level could lead the pair to explore the region around its recent high of 84.14 level, recorded on August 5.
USD/INR: Daily Chart
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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