USD/INR gathers strength, supported by month-end, year-end US Dollar demand
- The Indian Rupee tumbles in Friday’s Asian session.
- A firm USD and importers’ month-end USD demand weigh on the INR.
- The RBI is likely to intervene in the FX market to prevent the local currency from depreciating further.
The Indian Rupee (INR) extends the decline to near an all-time low on Friday. The local currency remains under selling pressure due to sustained strong US Dollar (USD) demand from importers, foreign investors, and oil-related companies.
Nonetheless, any routine intervention by the Reserve Bank of India (RBI) could help limit the INR’s losses. The preliminary reading of the US Goods Trade Balance for November is due later on Friday. Trading volumes are likely to be low ahead of next week’s New Year holiday.
Indian Rupee softens to near a record low amid a mix of global and domestic challenges
- India's economy is estimated to grow at around 6.5% in fiscal year 2024/25, closer to the lower end of its 6.5%-7.0% projection, according to the finance ministry's monthly economic report for November.
- Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Tuesday, offloading shares worth ₹2,454.21 crore, according to exchange data.
- “Importers were pretty active in the session, while trading volumes were relatively low towards the year-end,” a trader with a private bank said.
- "Slowing FDI flows, weak manufacturing export growth, and narrowing policy rate differentials with the US are likely to pressurise the INR, according to the recent Standard Chartered Bank report. It expects the INR to depreciate modestly, reaching 85.5 per US Dollar over the next 12 months.
- The US weekly Initial Jobless Claims for the week ending December 21 declined to 219,000, down from 220,000 in the previous week, according to the US Department of Labor on Thursday. This reading came in below the market consensus of 224,000.
USD/INR’s constructive bias remains in place
The Indian Rupee weakens on the day. Technically, the price action shows a strong uptrend on the daily timeframe, with the pair being well-supported above the key 100-day Exponential Moving Average (EMA). However, the 14-day Relative Strength Index (RSI) is near 74.25, suggesting an overbought condition. This means that additional consolidation should not be ruled out before positioning for any short-term USD/INR appreciation.
For bulls, the ascending channel upper boundary at 85.35 acts as an immediate resistance level for the pair. Sustained trading above this level could draw in more buyers and send prices to 85.50, en route to the 86.00 psychological level.
On the flip side, the potential support level for USD/INR emerges at the 85.05-85.00 region, representing the lower boundary of the trend channel and the round mark. A decisive break below the mentioned level may trigger momentum sellers to step in and take the price towards 84.27, the 100-day EMA.
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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