USD/INR weakens ahead of Indian PMI releases
- The Indian Rupee gains ground in Monday’s Asian session.
- Fresh foreign and USD inflows support the INR.
- The preliminary readings of the India HSBC PMI and US S&P Global PMI reports will be the highlights later on Monday.
The Indian Rupee (INR) trades stronger on Monday after closing its strongest in over two months. Positive domestic equities and fresh foreign fund inflows could provide some support to the Indian currency. Additionally, the US Dollar (USD) inflows help mitigate the impact of the decline in Asian peers.
Nonetheless, a rebound in Crude Oil prices amid the ongoing geopolitical tensions in the Middle East might weigh on the local currency as India is the world's third-largest oil consumer. Investors brace for the preliminary reading of India HSBC Purchasing Managers Index (PMI) data for March, which is due later on Monday. On the US docket, the advanced US S&P Global PMI will be released.
Indian Rupee holds positive ground as inflows resume
- Forex traders said the INR has been gaining as FPIs turned net buyers for the second time during the week with respect to equity and have been buying heavily into debt.
- “Given the current market dynamics, the USD-INR pair is expected to trade between 86.00 and 86.80 in the near term. However, with the current global headwinds a slight rebound towards the 86.50-86.60 range is expected," said CR Forex Advisors MD Amit Pabari.
- Trump has declared April 2 to be "Liberation Day" for the US, when he will implement so-called reciprocal tariffs that seek to equalize US tariffs with those charged by trading partners, as well as tariffs on sectors such as automobiles, pharmaceuticals, and semiconductors, which he has repeatedly stated would be enacted on that day.
- Trump's administration said that it will revoke the temporary legal status of more than half a million migrants from Cuba, Haiti, Nicaragua and Venezuela, per BBC. Those migrants have been warned to leave the country before their permits and deportation shields are cancelled on April 24.
- Fed policymakers projected two quarter-point cuts later this year, the same median forecast as in December.
USD/INR seems fragile, downside risks appear below the 100-day EMA
The Indian Rupee trades on a firmer note on the day. The bullish outlook of the USD/INR pair looks vulnerable as the price hovers around the key 100-day Exponential Moving Average on the daily chart. The pair could resume its downside bias if it decisively crosses below the 100-day EMA. The 14-day Relative Strength Index (RSI) stands below the midline near 32.70, suggesting that further downside looks favorable.
The first upside barrier for USD/INR emerges at 86.48, the low of February 21. Further north, the next hurdle is seen at the 87.00 psychological level. Sustained trading above this level could see a rally to 87.38, the high of March 11.
On the other hand, a breach of the 100-day EMA of 85.97 could drag the pair lower to 85.60, the low of January 6. The additional downside filter to watch is 84.84, the low of December 19, 2024.
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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