USD/INR extends upside on trade tariff concerns
- The Indian Rupee weakens in Monday’s Asian session.
- Ongoing outflows from Indian stocks and the threat of a global trade war undermine the INR.
- Lower crude oil prices and RBI intervention might help limit INR’s losses.
The Indian Rupee (INR) trades with negative bias on Monday. The local currency remains on the defensive amid persistent outflows from local stocks, ongoing economic uncertainty and trade tariff concerns. Foreign investors have withdrawn almost $15 billion from Indian shares so far this year, putting outflows on track to surpass the record $17 billion registered in 2022. The selloff has wiped out $1.3 trillion from India’s market value.
However, a fall in crude oil prices might help limit the INR’s losses as India is the world's third-largest oil consumer. Additionally, the Reserve Bank of India (RBI) is expected to continue defending the INR, with the government expressing confidence that the central bank’s intervention would stagger the pace of the slide. This, in turn, might cap the upside for the pair. In the absence of the top-tier economic data releases from the US and India on Monday, the USD/INR pair will be influenced by the USD.
Indian Rupee remains weak on global uncertainty and persistent outflows
- RBI said last week that it will infuse $21 billion in Rupee liquidity into the banking system in a bid to ease lending conditions and boost economic growth.
- The US Nonfarm Payrolls (NFP) rose by 151K in February, compared to the 125K increase (revised from 143K) seen in January, according to the US Bureau of Labor Statistics (BLS) on Friday. This figure came in weaker than the market expectation of 160K.
- The Unemployment Rate in the US edged higher to 4.1% in February from 4.0% in January. The annual wage inflation, as measured by the change in the Average Hourly Earnings, climbed to 4.0% from 3.9% (revised from 4.1%).
- San Francisco Fed President Mary Daly said late Sunday that rising uncertainty among businesses could dampen demand in the US economy but does not justify a change in interest rates.
- Fed Chair Jerome Powell noted on Friday, warning that policy uncertainty makes it difficult for the US central bank to enact policy adjustments.
- Fed Governor Adriana Kugler stated that whiplash trade policies could do a lot of damage, including pinning inflation at a persistently higher level.
USD/INR paints a positive picture despite consolidation in the near term
The Indian Rupee trades in a negative territory on the day. The constructive outlook of the USD/INR pair remains in place, characterized by the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The upward momentum is supported by the 14-day Relative Strength Index (RSI), which stands above the midline near 55.0, showing signs of bullish demand.
The immediate resistance level for USD/INR emerges at 87.53, the high of February 28. A decisive break above this level could draw in buying pressure to an all-time high near 88.00, en route to 88.50.
On the other hand, the first downside target to watch is 86.48, the low of February 21. Extended downswings can drag the pair lower to 86.14, the low of January 27, followed by 85.60, the low of January 6.
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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