USD/INR drifts higher as US Dollar demand surges
- The Indian Rupee weakens in Thursday’s Asian session.
- The weakening in the Chinese Yuan, firmer USD and dovish expectations following Malhotra's appointment weigh on the INR.
- The Indian CPI inflation and US PPI data will be the highlights on Thursday.
The Indian Rupee (INR) loses ground on Thursday after hitting a record low in the previous session. A sharp decline in the Chinese Yuan and increased US Dollar (USD) from importers and foreign banks might drag the local currency lower. Furthermore, the appointment of career bureaucrat Sanjay Malhotra as the next governor of the Reserve Bank of India (RBI) prompted traders to raise their expectations on the interest rate cuts, which could exert some selling pressure on the INR.
Nonetheless, the downside for the Indian Rupee might be limited as the RBI might step in to limit further depreciation. The Indian central bank often intervenes by selling USD to prevent steep INR weakness.
Traders will keep an eye on the US November Producer Price Index (PPI) and weekly Initial Jobless Claims, which are due later on Thursday. On the Indian docket, the CPI inflation, Industrial Output and Manufacturing Output data will be released on Thursday.
Indian Rupee remains weak amid multiple challenges
- India’s GDP growth is estimated to rise to 7% in FY26, led by a capex cycle reboot, tailwinds from back-ended fiscal spending in FY25, a cut in the cash reserve ratio (CRR), and likely further macro-prudential easing, which could help revive credit growth, according to Axis Bank.
- Economists at Capital Economics anticipate a 25 bps cut in India’s repo rate at Malhotra’s first MPC meeting in February, if not in an unscheduled meeting earlier. Economists estimated that the cut would come in April under Das’ leadership.
- The US Consumer Price Index (CPI) inflation rose to 2.7% YoY in November from 2.6% in October, the US Bureau of Labor Statistics showed on Wednesday. This reading was in line with the market consensus.
- The core CPI, excluding volatile food and energy prices, climbed 3.3% YoY in November, compared to 3.3% during the same period. On a monthly basis, the headline CPI increased 0.3% MoM, while the core CPI rose 0.3% MoM in November.
- Fed funds futures are pricing in a roughly 95% chance that the US central bank lowers rates in the December meeting, according to CME’s FedWatch Tool.
USD/INR keeps the bullish vibe in the longer term
The Indian Rupee softens on the day. The USD/INR pair paints a positive picture on the daily chart as the pair is well-supported above the key 100-day Exponential Moving Average (EMA). Nonetheless, the 14-day Relative Strength Index (RSI) is located above the midline near 67.70, suggesting the support level is more likely to hold than to break.
The potential resistance level emerges at 85.00, representing the ascending trend channel and the psychological level. Extended gains above this level could see a rally to 85.50.
On the other hand, the lower boundary of the trend channel at 84.70 acts as an initial support level for USD/INR. Sustained trading below the mentioned level could pave the way to 84.22, the low of November 25, followed by 84.10, 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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