USD/INR holds steady ahead of Fed rate decision
- The Indian Rupee trades flat in Wednesday’s early Asian session.
- The concerns about Trump's tariffs and equity outflows weigh on the INR, but RBI intervention could help contain excessive losses.
- The Fed monetary policy meeting will be closely monitored later on Wednesday.
The Indian Rupee (INR) flat lines on Wednesday after its largest single-day fall in two weeks in the previous session. The local currency remains on the defensive amid renewed concerns about trade tariffs from US President Donald Trump, along with the sustained foreign fund outflows. Nonetheless, the routine foreign exchange intervention from the Reserve Bank of India (RBI) might help limit the INR’s losses.
The US Federal Reserve (Fed) interest rate decision will be in the spotlight later on Wednesday, with no change in rate expected. Investors will closely monitor Fed Chair Jerome Powell’s press conference as it might offer additional insights into the monetary policy outlook. The cautious stance from the Fed officials could provide some support to the Greenback and act as a headwind for the pair. On the Indian docket, the Federal Fiscal Deficit will take center stage on Friday.
Indian Rupee steadies amid Trump’s tariff threats
- India must shift away from its dependence on raw material exports and focus on further expanding its manufacturing sector to boost economic growth, said Indian Prime Minister Narendra Modi.
- "Malaysia, Singapore and India stand out as the economies within Emerging Asia where these critical products might account for significant proportions of their shipments to the U.S., followed by Taiwan, the Philippines, Thailand and Korea," Barclays said in a note.
- Late Tuesday, US President Donald Trump's press secretary, Karoline Leavitt, said that the plan to impose Canada and Mexico with punishing tariffs on February 1 is still in play.
- The Durable Goods Orders in the US declined by 2.2%, or $6.3 billion, in December to $276.1 billion, according to the US Census Bureau on Tuesday. This reading followed a 2% decrease reported in November and came in worse than the market expectation for an increase of 0.8%.
- Market pricing is pointing to a near 100% certainty that the Fed will keep the policy rate in a target range of 4.25%-4.50%, according to the CME FedWatch tool.
USD/INR maintains its constructive bias in the longer term
The Indian Rupee trades a flat note on the day. The USD/INR pair keeps the bullish vibe on the daily timeframe as the price has broken above the descending triangle pattern while being well-supported above the key 100-day Exponential Moving Average (EMA). The upward momentum is confirmed by the 14-day Relative Strength Index (RSI), which is located above the midline near 65.30, indicating that further upside cannot be ruled out.
The key resistance level for USD/INR emerges at an all-time high of 86.69. Sustained trading above the mentioned level could see a rally to the 87.00 psychological mark.
In the bearish event, the initial support level is seen at 86.31, the low of January 28. A breach of this level could pave the way to 86.14, the low of January 24. Further south, the next contention to watch is 85.85, the low of January 10.
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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