USD/INR gains ground on tariff woes
- The Indian Rupee edges lower in Tuesday’s Asian session.
- Trade tariff worries, sustained foreign outflows, and concerns on an Indian economic slowdown weigh on the INR.
- Investors await Fed Chair Jerome Powell’s semi-annual testimony on Tuesday.
The Indian Rupee (INR) remains weak on Tuesday after falling to a fresh record low in the previous session. The risk of fresh US trade tariffs spurs losses in most regional currencies, including the INR. Investors are concerned about the Indian economy as data signal that Asia’s third-largest economy is slowing. The country’s Gross Domestic Product (GDP) is forecast to expand by 6.4% in the year through March, the weakest pace since the pandemic. Additionally, the sustained portfolio outflows contribute to the local currency’s downside.
Nonetheless, the Reserve Bank of India (RBI) might step in routinely to curb excess volatility in the currency. The frequent interventions have weighed on India's Foreign exchange reserves, which are hovering near an 11-month low. Federal Reserve (Fed) Chair Jerome Powell’s semi-annual testimony will be the highlight later on Tuesday.
Indian Rupee loses traction amidst tariff threats
- The Indian Rupee has declined continuously since Trump's victory in the US elections last November, falling by around 4.5% since then.
- "We believe the risks to INR over the coming months are skewed towards relative weakness. If the broad USD were to weaken, we believe the downside in USD/INR would be mitigated by active RBI FX purchases," Nomura said in a note.
- India has high tariffs that lock out imports, Trump's top economic adviser Kevin Hassett said on Monday, adding that India's Prime Minister had a lot to discuss with Trump when the two leaders meet soon.
- India is considering tariff cuts in at least a dozen sectors, from electronics to medical equipment and chemicals, in order to promote US exports and align with India's domestic manufacturing ambitions.
- India also plans to propose increasing energy product imports from the US, estimated at over $11 billion in the first eleven months of 2024, to alleviate trade imbalances.
- On Monday, US President Donald Trump expanded his steel and aluminum tariffs to cover all imports, effectively canceling deals with the European Union, the United Kingdom, Japan and others.
- The new executive order builds on the 25% tariff on steel and the 10% tariff the first Trump administration imposed in 2018 by raising duties, closing loopholes and eliminating exemptions, according to a White House official.
USD/INR keeps the constructive view but bulls turn cautious amid a shooting star
The Indian Rupee softens on the day. According to the daily chart, the positive view of the USD/INR pair prevails as the price is above the key 100-day Exponential Moving Average (EMA), indicating that bulls have the upper hand.
However, the 14-day Relative Strength Index (RSI) reaches overbought territory beyond the 70.00 mark, potentially signaling a temporary weakness or further consolidation in the near term.
The first upside barrier for USD/INR emerges in the 87.95-88.00 zone, representing an all-time high and psychological level. If buyers step in, the pair could see a rally to 88.50.
On the flip side, the initial support level to watch is 87.31, the low of February 7. If bearish momentum persists, the pair could fall back to the 87.05-87.00 regions, representing the low of February 5 and the round mark. Further south, the next contention level is seen at 86.51, the low of February 3.
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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