USD/INR holds steady amid foreign outflows
- The Indian Rupee trades flat in Monday’s Asian session.
- Persistent selling of domestic stocks from overseas could weigh on the INR.
- Traders brace for the Chicago Fed National Activity Index for January, which is due later on Monday.
The Indian Rupee (INR) flat lines on Monday. The concern over Foreign Portfolio Investment (FPI) outflows, with foreign investors offloading over $11 billion in Indian stocks this year might weigh on the local currency.
Nonetheless, continued softness in the US Dollar (USD) might help offset these outflows, lifting the INR. Additionally, the likely intervention by the Reserve Bank of India (RBI) could prevent the Indian Rupee from significantly depreciating. Lower crude oil prices might support the INR as India is the world's third-largest oil consumer.
Later on Monday, the Chicago Fed National Activity Index for January will be released. The attention will shift to the preliminary reading of US Gross Domestic Product (GDP) for the fourth quarter (Q4), which will be published on Thursday.
Indian Rupee steadies amid foreign fund outflows
- The HSBC India Manufacturing Purchasing Managers Index (PMI) eased to 57.1 in February from 57.5 in January. The Indian Services PMI rose to 61.1 in February versus 56.5 prior.
- The Composite PMI improved to 60.6 in February from 57.7 in January.
- “Rapid restocking around the world continues to lift new export orders. A healthy acceleration in orders and output is keeping firms optimistic about the future. Input prices eased while output prices rose at a faster pace, leading to improved margins, especially for goods producers,” said Pranjul Bhandari, Chief India Economist at HSBC.
- The US S&P Global Composite PMI declined to 50.4 in February versus 52.7 prior.
- The US S&P Global Manufacturing PMI climbed from 51.2 in February to 51.6 in January, beating the estimation of 51.5. The Services PMI dropped from 52.9 in January to 49.7 in February, weaker than the 53.0 expected.
- The University of Michigan Consumer Sentiment Index fell to 64.7 in February, compared to the previous reading and the expectation of 67.8.
USD/INR maintains its constructive bias despite consolidation in the near term
The Indian Rupee trades on a flat note on the day. The USD/INR pair maintains a positive view as the price holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. However, the 14-day Relative Strength Index (RSI) hovers around the 14-day Relative Strength Index (RSI), suggesting that further consolidation or downside cannot be ruled out.
The first upside barrier for USD/INR is located at the 87.00 psychological level. Extended gains above the mentioned level could pave the way to an all-time high near 88.00, en route to 88.50.
On the other hand, a decisive break below the low of February 12 at 86.35 could see a drop to 86.14, the low of January 27. The additional downside target 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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