USD/INR holds steady ahead of RBI rate decision
- The Indian Rupee flatlines in Wednesday’s Asian session.
- An escalating global trade war and potential US recession undermine the INR.
- The RBI interest rate decision and FOMC Minutes will take center stage later on Wednesday.
The Indian Rupee (INR) trades flat on Wednesday after reaching the largest single-day loss in nearly three months in the previous session. The local currency remains under pressure amid a looming global trade war stoking fears of economic meltdown. Furthermore, continued foreign capital outflows and US Dollar (USD) buying from importers, foreign investors and oil companies weigh on the Indian currency.
Nonetheless, a fall in crude oil prices might help limit the INR’s losses. It’s worth noting that India is the world's third-largest oil consumer, and lower crude oil prices tend to have a positive impact on the Indian currency value.
Traders will closely monitor the Reserve Bank of India (RBI) interest rate decision later on Wednesday. The Monetary Policy Committee (MPC) is widely expected to cut rates by 25 basis points (bps) to 6.0%. On the US docket, the FOMC Minutes will be in the highlight later on the same day. Also, the Federal Reserve's (Fed) Thomas Barkin is scheduled to speak.
Indian Rupee seems vulnerable amid Trump tariff turmoil
- “The rupee experienced a decline in value against the US dollar, primarily driven by strong demand for dollars from importers and ongoing outflows of foreign funds from Indian equity markets,” forex traders said.
- Pranjul Bhandari, HSBC’s Chief India Economist, expects consecutive interest rate cuts from the RBI at the central bank’s April, June and August meetings.
- US Customs and Border Protection said on Tuesday that it is prepared to begin collecting country-specific tariffs from 86 US trade partners.
- Trump noted that he wasn’t considering a pause on his plan to implement sweeping additional tariffs on dozens of countries despite contact from trade partners seeking to avoid the levies, but hinted he would be open to some negotiations.
- San Francisco Fed President Mary Daly said on Tuesday that there's no rush to cut interest rates as the economy and the labor market are still solid and a lot is still unclear about the size and scope of Trump's tariffs.
- Chicago Fed President Austan Goolsbee noted that Trump's tariffs are "way bigger" than had been modeled, and it's unclear how quickly or fully those higher costs will be passed on to consumers.
USD/INR resumes recovery above the 100-day EMA
The Indian Rupee trades on a flat note on the day. The USD/INR pair resumes its uptrend on the daily chart, with the price crossing above the key 100-day Exponential Moving Average (EMA). However, further consolidation cannot be ruled out in the near term as the 14-day Relative Strength Index (RSI) hovers around the midline.
The immediate resistance level for USD/INR is located at the pullback of 86.48. Sustained upside momentum could take the pair to the next bullish target at the 87.00 psychological level. The next hurdle is seen at 87.53, the high of February 28.
On the downside, the first downside target to watch is 85.42, the low of March 31. Further south, the next contention level emerges at 85.20, the low of April 3, followed by 85.00, the round mark.
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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