USD/INR gains momentum ahead of US CPI release
- The Indian Rupee softens in Wednesday’s Asian session.
- The strong USD, higher crude oil prices, and equity market capital outflows exert selling pressure on the INR.
- Investors brace for the US December CPI inflation data, which is due later on Wednesday.
The Indian Rupee (INR) weakens on Wednesday, pressured by intense demand for the US Dollar (USD). Furthermore, a rise in crude oil prices and continued outflows from foreign investors contribute to the INR’s downside.
Any significant depreciation of the INR might be limited, even though the Reserve Bank of India (RBI) adopts a flexible approach to the INR and does not intend to target specific levels for the local currency. Investors will closely monitor the US December Consumer Price Index (CPI) inflation data, which is due later on Wednesday. Also, the Federal Reserve’s (Fed) Thomas Barkin, Neel Kashkari, John Williams, and Austan Goolsbee are scheduled to speak later in the day.
Indian Rupee remains fragile due to global economic factors
- The "Trump Tantrum," referring to the impact of Donald Trump's presidency on the Indian Rupee, is likely to be a short-term phenomenon, noted the State Bank of India (SBI).
- RBI Governor Sanjay Malhotra has shown a willingness to allow the INR to move more freely in tandem with peers in the region while still intervening in the foreign exchange market to curb excessive moves, per Bloomberg.
- India’s Wholesale Price Index (WPI) inflation rose to 2.37% in December from 1.89% in November, according to the Ministry of Commerce and Industry on Tuesday. This figure came in hotter than the expectation of 2.30%.
- India’s Consumer Price Index (CPI) rose 5.22% YoY in December, compared to 5.48% in the previous reading, softer than the expectation of 5.3%.
- The US PPI rose by 3.3% YoY in December, compared to 3.0% in November, the US Bureau of Labor Statistics reported on Tuesday. This reading came in softer than the market expectation of 3.4%.
- The core PPI, excluding the volatile prices of food and energy, climbed 3.5% YoY in December versus 3.4% prior, below the market consensus of 3.8%.
USD/INR’s bullish tone remains in play, overbought RSI warrants caution for bulls
The Indian Rupee trades softer on the day. The strong uptrend of the USD/INR pair remains in place, with the pair forming higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. However, the 14-day Relative Strength Index (RSI) moves beyond the 70.00 mark, indicating overbought conditions and warranting some caution. This suggests that further consolidation is on the cards.
The immediate resistance level for USD/INR emerges at an all-time high of 86.69. If buyers hold the line and trading stays above this level, the pair could gear up for another run at the 87.00 psychological level.
On the bearish move, the initial support level for the pair is located at 85.85, the low of January 10. Sustained trading below the mentioned level could drag the pair toward 85.65, the low of January 7, followed by 85.00, a round figure.
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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