USD/INR gathers strength on Trump's threat through tariffs
- The Indian Rupee remains under selling pressure on Tuesday.
- The INR declines tracking weaker Chinese Yuan, sustained foreign fund outflows and strong USD demand.
- The Fed rate decision and India’s Federal Fiscal Deficit will be the highlights for this week.
The Indian Rupee (INR) drifts lower on Tuesday as a decline in the Chinese Yuan amid concerns over US President Donald Trump's trade tariffs put pressure on the Asian peers. Additionally, likely equity outflows and a muted trend in domestic equities contribute to the INR’s downside. However, the downside of the Indian Rupee might be limited as the Reserve Bank of India (RBI) will likely intervene in the foreign exchange market to prevent the local currency from significantly depreciating.
The US Federal Reserve (Fed) monetary policy meeting will take center stage on Wednesday. The Fed is widely expected to make no changes to the policy rate at its January meeting, but traders will take more cues from the Press Conference for guidance for policy action in March. On the Indian docket, the Federal Fiscal Deficit will be released on Friday, which might introduce measures to stimulate economic growth.
Indian Rupee remains vulnerable amid a weak macroeconomic environment
- "Trump's threat through tariffs and sanctions will concern global trade, and keep emerging market currencies, and thereby the rupee under pressure," said Jigar Trivedi, a senior analyst at Reliance Securities.
- The RBI announced on Monday a host of measures to inject liquidity into the banking system, including bond purchases and dollar/rupee swaps. The Indian central bank's efforts are expected to inject 1.5 trillion rupees ($17.39 billion) into the banking system.
- US President Donald Trump late Monday announced plans to levy tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper.
- US Treasury Secretary Scott Bessent is pushing for new universal tariffs on US imports to start at 2.5% and rise gradually, per the Financial Times. However, Trump said he wants tariffs much larger than 2.5%.
- US New Home Sales rose 3.6% to a seasonally adjusted annual rate of 698,000 units in December from 674,000 units in November, according to the Commerce Department's Census Bureau on Monday. This reading came in better than the estimation of 670,000 units.
USD/INR keeps the bullish vibe in the longer term
The Indian Rupee trades a weaker note on the day. The strong uptrend of the USD/INR pair prevails as the price has broken above the descending triangle pattern while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. The 14-day Relative Strength Index (RSI) stands above the midline near 63.20, suggesting that further upside looks favorable.
The all-time high of 86.69 appears to be a tough nut to crack for bulls. A bullish breakout above this level could pave the way to the 87.00 psychological mark.
If more bearish candlesticks show up, we could see a drop to 86.14, the low of January 24. A breach of the mentioned level could expose 85.85, the low of January 10. The additional downside filter to watch is 85.65, the low of January 7.
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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