USD/INR strengthens ahead of India’s Manufacturing PMI data
- The Indian Rupee softens in Thursday’s Asian session.
- USD bids from importers and subdued foreign inflows continue to undermine the INR.
- Investors brace for India’s December HSBC Manufacturing PMI and the US weekly Initial Jobless Claims.
The Indian Rupee (INR) remains weak on Thursday. The reasons attributed to the weakening in the local currency are an increase in demand for US Dollar (USD) from importers, a higher 10-year US Treasury yield and concerns about India's slowing economic growth.
On the other hand, the downside for the INR might be limited as the Reserve Bank of India (RBI) will likely continue to intervene in the currency market to curb volatility. Later on Thursday, India’s HSBC Manufacturing Purchasing Managers Index (PMI) for December is due. On the US docket, the weekly Initial Jobless Claims and S&P Global Manufacturing PMI for December will be published.
Indian Rupee remains fragile amid importer USD bids and domestic factors
- “The rupee is still susceptible to downward pressure, given strong dollar bids and robust US yields,” said Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors LLP.
- According to Reuters, the bearish bias of the INR is driven by a combination of factors, including the Greenback maintaining its strength near 108.48 and persistent concerns over slowing domestic growth and a widening trade deficit.
- India's fiscal deficit for the April-November period of FY25 stood at 8.47 trillion rupees ($98.90 billion), or 52.5% of the estimate for the financial year, according to official data released on Tuesday. The fiscal deficit widened from 50.7% reported in the comparable year-earlier period.
- The real GDP growth is estimated at 6.6% for 2024-25, and 6.9% for the first quarter of 2025-26, as per the Reserve Bank of India (RBI).
- The US Housing Price Index rose 0.4% MoM in October versus 0.7% prior, according to the Federal Housing Finance Agency. This reading came in weaker than the 0.5% expected.
- The US S&P/Case-Shiller Home Price Indices climbed 4.2% YoY in October, compared to 4.6% in the previous reading, beating the estimation of 4.1%.
USD/INR maintains a positive tone despite the overbought RSI condition
The Indian Rupee trades in negative territory on the day. Technically, the USD/INR broke above the ascending trend channel over the past week. The constructive view of the pair prevails as the price holds above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Nonetheless, the 14-day Relative Strength Index (RSI) reading above 70 suggests an overbought condition and signals that further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.
The all-time high of 85.81 acts as an immediate resistance level for USD/INR. If bulls manage to break above this level, then a move to the 86.00 psychological level could be in play in the short term.
On the flip side, the first downside target is seen at the resistance-turned-support level of 85.50. A breach of the mentioned level could draw in sellers to 85.00, the round figure, en route to the 100-day EMA at 84.37.
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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