USD/INR flat lines amid persistent US Dollar strength, Trump tariff threats
- The Indian Rupee steadies in Monday’s Asian session.
- A decline in the Chinese Yuan, persistent USD demand and Trump’s tariff threats continue to undermine the INR.
- India’s December HSBC Composite and Services PMI data are due later on Monday.
The Indian Rupee (INR) holds steady on Monday after ending at a record closing low in the previous session. The local currency remains vulnerable amid the weakening of the Chinese Yuan, fewer rate cut expectations by the US Federal Reserve (Fed) and the threat of tariffs from incoming US President-elect Donald Trump’s administration.
Nonetheless, the Reserve Bank of India (RBI) is likely to sell the US Dollar (USD) to prevent the INR from depreciating. Looking ahead, traders brace for India’s HSBC Composite and Services Purchasing Managers Index (PMI) for December. On the US docket, the S&P Global Composite and Services PMI for December will be released. Also, the Fed’s Lisa Cook is scheduled to speak later in the day.
Indian Rupee remains flat ahead of Indian PMI data release
- "Global developments remain the wild card, with the U.S. government due to take office in mid-January 2025," said Radhika Rao, executive director and senior economist at DBS Bank.
- The Indian Rupee is likely to experience slight depreciation in 2025, driven by volatile foreign portfolio investment (FPI) flows and a potentially stronger Greenback, according to the Bank of Baroda report.
- The US Manufacturing PMI climbed to 49.3 in December versus 48.4 prior, according to the Institute for Supply Management (ISM) on Friday. This reading was above the market consensus of 48.4.
- San Francisco Fed President Mary Daly said on Saturday that despite significant progress in lowering price pressures over the past two years, inflation remains uncomfortably above the 2% target, per Bloomberg.
- Fed Governor Adriana Kugler noted on Saturday that inflation remains uncomfortably above the Fed’s target, but the central bank is working on that.
- Richmond Fed President Thomas Barkin stated on Friday that the Fed's benchmark policy rate should stay restrictive until it is more certain that inflation is returning to its 2% goal.
USD/INR’s bullish tone remains in play but overbought RSI warrants caution for bulls
The Indian Rupee trades on a flat note on the day. Technically, the bullish view of the USD/INR pair remains intact as the pair has broken above the ascending trend channel over the past week and is well supported above the key 100-day Exponential Moving Average (EMA) on the daily timeframe.
However, the overbought 14-day Relative Strength Index (RSI) warrants caution for bulls. This suggests that further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.
On the upside, the all-time high of 85.81 appears to be a tough nut to crack for bulls. A decisive break above this level could see a rally to the 86.00 psychological mark.
On the flip side, the resistance-turned-support level of 85.55 acts as an initial support level for the pair. Sustained trading below the mentioned level could pave the way to 85.00, en route to 84.43, 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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