USD/INR softens on steady FII inflows, positive US-India trade talks
- Indian Rupee strengthens in Tuesday’s Asian session.
- Optimism over US-India trade talks and steady foreign portfolio investment inflows into equities support the INR.
- Investors await the US April Consumer Confidence and March JOLTS Job Openings report, which are due later on Tuesday.
The Indian Rupee (INR) extends its upside on Tuesday after logging its best day in more than two weeks in the previous session. The positive developments surrounding US-India trade talks provide some support to the local currency. US Treasury Secretary Scott Bessent said on Monday that many top trading partners of the US had made 'very good' proposals to avert US tariffs, and one of the first deals to be signed would likely be with India. Furthermore, foreign investors have stepped up buying of Indian stocks over the last week, a reversal from the selling pressure witnessed earlier in the month. This, in turn, acts as a tailwind for the Indian Rupee.
Nonetheless, the renewed US Dollar (USD) demand due to softening tensions between the United States and China might weigh on the Indian currency. Additionally, concerns over geopolitical tensions between India and Pakistan might contribute to the INR’s downside.
The US April Consumer Confidence and March JOLTS Job Openings report will be released later on Tuesday. All eyes will be on the preliminary reading of US Gross Domestic Product (GDP) for the first quarter (Q1) on Wednesday ahead of the US Nonfarm Payrolls (NFP) report, which is due later on Friday.
Indian Rupee gains momentum as foreign portfolio investors (FPIs) continue to buy equities
- The ceasefire violation along the Line of Control (LoC) came days after the Pahalgam terror attack, which killed 26 people, mostly tourists, in the Baisaran valley near Pahalgam, Jammu and Kashmir.
- US Treasury Secretary Scott Bessent said on Monday that the US government is in contact with China but that it’s up to Beijing to take the first step in de-escalating the tariff fight with the US due to the imbalance of trade between the two nations.
- "Vice President Vance was in India last week and talked about substantial progress. I have mentioned that the negotiations with the Republic of Korea have gone very well, and I think we've had some very substantial negotiations with our Japanese allies," said Bessent.
- US President Donald Trump plans to soften the impact of his automotive tariffs by preventing duties on foreign-made cars from stacking with other tariffs and easing levies on foreign parts used in car manufacturing, per the Wall Street Journal. Those actions are expected tomorrow.
- The Fed is expected to leave interest rates unchanged in the range of 4.25%-4.50% in the policy meeting on May 6-7, according to the CME FedWatch tool.
USD/INR remains bearish under the key 100-day EMA
The Indian Rupee edges higher on the day. The USD/INR pair keeps the bearish vibe, with the price holding below the key 100-day Exponential Moving Average (EMA) on the daily chart. The path of least resistance is to the downside as the 14-day Relative Strength Index (RSI) stands below the midline near 37.00.
A bearish break from the lower limit of the descending trend channel of 84.80 could drag USD/INR toward 84.22, the low of November 25, 2024. Sustained trading below the mentioned level could expose 84.08, the low of November 6, 2024.
On the other hand, the crucial resistance level emerges at 85.80, the 100-day EMA. A decisive break above this level could pick up more momentum and aim for 86.35, the upper boundary of the trend channel.
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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