USD/INR steadies ahead of Fed’s Goolsbee speech
- The Indian Rupee holds steady in Monday’s Asian session.
- Significant foreign outflows and Trump trades might drag the INR lower.
- The Fed’s Goolsbee is set to speak later on Monday.
The Indian Rupee (INR) flat lines on Monday amid the modest decline in the US Dollar (USD). The renewed Greenback demand from investors and weakening of the Chinese Yuan are likely to keep pressure on the Iocal currency in the near term. Additionally, the unabated foreign fund outflows contribute to the INR's downside.
The routine intervention by the Reserve Bank of India (RBI) by selling USD might help limit the Indian Rupee’s losses, though this has led to a drop in India's forex reserves. In the absence of top-tier Indian and US economic data releases due on Monday, the focus will remain on risk sentiment and the speech from US Federal Reserve (Fed) Austan Goolsbee.
Indian Rupee looks vulnerable amid multiple challenges
- The Indian Rupee is expected to be trading at 84.5 per US Dollar by the end of December this year, according to the median forecast of the Business Standard poll.
- Moody's Ratings estimated the Indian economy to grow by 7.2% in 2024, driven by a gradual recovery in household spending and easing inflation pressures. The rating agency further projected growth rates of 6.6% and 6.5% in 2025 and 2026.
- "We remain negative on the outlook for Asian FX through H1 2025, given the potential negative economic impact of likely US tariff hikes," MUFG Bank said in a note.
- The US Retail Sales rose 0.4% in October, compared to 0.8% recorded in September (revised from 0.4%), the Commerce Department's Census Bureau revealed on Friday. This figure was stronger than the 0.3% expected.
- Chicago Fed President Austan Goolsbee said on Friday that markets tend to overreact to interest rate changes and that the Fed should maintain a slow and steady approach to reaching the neutral rate.
- Boston Fed President Susan Collins noted that another rate cut in December is on the table, but it is not a "done deal," per Reuters.
- The markets have priced in nearly 60% of the 25 basis points (bps) rate cut by the Fed at the December meeting, according to the CME FedWatch Tool.
USD/INR still maintains its constructive bias
The Indian Rupee trades flat on the day. The longer-term uptrend of the USD/INR pair remains intact as the pair holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. Nonetheless, the 14-day Relative Strength Index (RSI) exceeds 70, indicating an overbought condition. This suggests that additional consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.
The resistance level to watch if buyers step in would be 84.50. A break above this barrier could pave the way for a test of the 85.00 psychological level.
On the other hand, the resistance-turned-support level at 84.35 acts as an initial support level for the pair. If the support level fails to hold, bears could push prices lower toward 84.00, the round mark. The additional downside threshold is seen at 83.88, the 100-day EMA.
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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