USD/INR posts modest gains ahead of Indian PMI release
- The Indian Rupee weakens in Friday’s Asian session.
- USD demand and foreign portfolio outflows could drag the INR lower.
- The flash HSBC India PMI and US S&P PMI data will be the highlights later on Friday.
The Indian Rupee (INR) loses ground, snapping the two-day winning streak on Friday. Increased US Dollar (USD) demand from foreign banks operating in India, foreign portfolio outflows from Indian equities and the uncertainty surrounding tariff announcements by US President Donald Trump weigh on the local currency.
However, the Reserve Bank of India (RBI) allowed the Indian Rupee to move both ways with minimal intervention. This, in turn, might help limit the INR’s losses. Additionally, a fall in crude oil prices could provide some support to the INR as India is the world's third-largest oil consumer.
Investors will keep an eye on the preliminary reading of HSBC India’s Purchasing Managers Index (PMI), which is due later on Friday. On the US docket, the flash S&P PMI data for January will be in the spotlight.
Indian Rupee remains weak amid President Trump’s demands
- Moody's Ratings on Thursday noted the Indian Rupee has depreciated by around 5% in the last two years and has fallen by 20% in the last five years, making it one of the weakest-performing currencies in South and Southeast Asia.
- Attributing the fall in the Indian rupee solely to the US dollar getting stronger, said former RBI Governor Raghuram Rajan. He added that any intervention by the Indian central bank on this could end up harming Indian exports, even as he urged policymakers to focus on creating more jobs and boosting household consumption.
- Trump stated at the World Economic Forum in Davos, Switzerland, that he would ask Saudi Arabia and the Organization of the Petroleum Exporting Countries (OPEC) to lower the price of oil.
- "With oil prices going down, I'll demand that interest rates drop immediately, and likewise they should be dropping all over the world," said Trump.
- The US Initial Jobless Claims for the week ending January 18 rose to 223K, compared to 217K in the previous week, according to the US Department of Labor (DoL) on Thursday. This reading came in above the market consensus of 220K.
- Continuing Jobless Claims increased 46K to 1.899M for the week ending January 11.
USD/INR’s uptrend remains uninterrupted
The Indian Rupee trades on a softer note on the day. The positive view of the USD/INR pair remains in place, with the price holding above the ascending trend line and the key 100-day Exponential Moving Average (EMA) on the daily chart. The path of least resistance is to the upside as the 14-day Relative Strength Index (RSI) stands above the midline near 66.70.
The all-time high of 86.69 acts as an immediate resistance level for USD/INR. Any follow-through buying above the mentioned level could draw in some buyers to the 87.00 psychological mark.
On the bearish side, the initial support level is seen at 86.18, the low of January 20. A breach of this level could see the next downside target at 85.85, the low of January 10, followed by 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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