USD/INR strengthens on Trump’s tariff plans
- The Indian Rupee weakens in Tuesday’s early Asian session.
- Ongoing equity outflows and US trade policy worries weigh on the INR.
- Investors await the Fedspeak later on Tuesday for a fresh impetus.
The Indian Rupee (INR) softens on Tuesday after reaching a three-week high in the previous session. Persistent capital outflows and renewed concerns about tariff threats from US President Donald Trump exert some selling pressure on the local currency.
On the other hand, the foreign exchange intervention from the Reserve Bank of India (RBI) could prevent the INR from significant depreciation. Additionally, the decline in crude oil prices on reports that OPEC+ will proceed with a planned oil output increase in April might help limit the Indian Rupee’s losses as India is the world's third-largest oil consumer.
The Federal Reserve’s (Fed) officials are scheduled to speak later on Tuesday, including Thomas Barkin and John Williams. On Wednesday, the Indian HSBC Composite Purchasing Managers' Index (PMI) and Services PMI will be in the spotlight.
Indian Rupee remains weak due to Trump’s latest tariff threats
- India’s Manufacturing PMI eased to a 14-month low of 56.3 in February, data released by S&P Global on Monday showed. This figure came in lower than the previous reading and the estimation of 57.1.
- "Although output growth slowed to the weakest level since December 2023, overall momentum in India's manufacturing sector remained broadly positive in February," said Pranjul Bhandari, Chief India Economist at HSBC.
- The RBI's net short dollar position in forwards and futures hit a record high of $77.5 billion in January 2025, as per data released after market hours on Friday.
- China’s Commerce Ministry vowed to take “necessary countermeasures” to safeguard China’s legitimate rights and interests. The ministry reiterated its firm opposition to the US move to impose another 10% tariff on Chinese imports starting on Tuesday.
- The US Manufacturing PMI declined to 50.3 in February versus 50.9 prior, according to the Institute for Supply Management (ISM) on Monday. This figure came in below the market consensus of 50.5.
USD/INR holds a bullish undertone
The Indian Rupee trades softer on the day. The USD/INR pair maintains a constructive outlook as the price remains well-supported above the key 100-day Exponential Moving Average (EMA) on the daily chart. Furthermore, the 14-day Relative Strength Index (RSI) is located above the midline near 61.00, suggesting buyers are maintaining some control.
If bullish momentum holds, USD/INR might retest 87.53, the high of February 28. A sustained break above this area could pave the way for a move toward an all-time high near 88.00, en route to 88.50.
If more red candlesticks appear and selling momentum increases, the pair could see a drop to the 87.05-87.00 zone, representing the low of February 27 and the round mark. The next bearish target to watch is 86.48, the low of February 21, followed by 86.14, the low of January 27.
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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