The Indian Rupee (INR) recovers some lost ground on Friday. The rise in crude oil prices amid escalating geopolitical tensions in the Middle East, the significant outflow from domestic equities and regional currency downtrends could undermine the INR.
Investors will closely monitor the HSBC India Services Purchasing Managers Index (PMI) on Friday, which is expected to decline to 58.9 in September from 60.9 in August. On the US docket, the employment data for September will take center stage, including Nonfarm Payrolls (NFP) and Unemployment Rate. The US economy is expected to see 140K jobs added in September. While the Unemployment Rate is expected to remain unchanged at 4.2% in the same period. If the report shows a weaker-than-expected outcome, this could weigh on the Greenback.
The Indian Rupee trades stronger on the day. The USD/INR pair maintains its constructive outlook on the daily chart as the price is well-supported above the key 100-day Exponential Moving Average (EMA). The path of least resistance level is to the upside as the 14-day Relative Strength Index (RSI) stands above the midline near 61.0.
The key upside barrier for USD/INR emerges at the 84.00 level, representing the upper boundary of the rectangle and psychological mark. A decisive break above this level could attract some buyers to 84.15 (the high of August 5), followed by 84.50.
On the downside, the low of October 1 at 83.80 acts as an initial support level for the pair. A breach of this level could lead to the 100-day EMA at 83.65. Further south, the additional downside filter to watch is 83.00, representing the round mark and the low of May 24.
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.