USD/INR jumps as Trump signs orders imposing tariffs on Mexico, Canada and China
- The Indian Rupee falls to a fresh record low in Monday’s Asian session.
- The strengthening USD and persistent outflows weigh on the INR.
- Investors await the US January ISM Manufacturing PMI report, which is due on Monday.
The Indian Rupee (INR) tumbles on Monday. Trump’s announcement of the imposition of tariffs on major trading partners including China, Canada, and Mexico exert some selling pressure on the local currency. Additionally, the stronger US Dollar (USD), persistent foreign institutional investors (FIIs) outflows, and risk-off sentiment contribute to the INR’s downside.
On the other hand, the foreign exchange intervention from the Reserve Bank of India (RBI) should defend the Rupee and cap its downside. Later on Monday, traders will keep an eye on the US ISM Manufacturing PMI for January.
Indian Rupee remains under selling pressure amid fears of a trade war
- India's foreign exchange reserves were down to $629.557 billion as of January 30, 2024, from $701.176 billion on October 4, 2024.
- Finance Minister Nirmala Sitharaman said in the budget on Friday that the Indian government will target a narrower fiscal deficit of 4.4% of Gross Domestic Product (GDP) for fiscal year 2025-26, down from a revised 4.8% for the current year.
- The government increased gross borrowing to 14.82 trillion rupees ($171.26 billion) from the market to fund the deficit, compared with 14.01 trillion rupees in the current year.
- The White House said on Saturday that a levy of 25% on Canadian and Mexican imports as well as an additional 10% tax on Chinese goods would come into force on Tuesday.
- Canada, Mexico and China have vowed to respond to sweeping new tariffs on their exports to the US announced by Trump.
- "Tariff announcement is necessary to hold China, Mexico, and Canada accountable for their promises to halt the flood of poisonous drugs into the United States," the White House said in a statement on X on Saturday.
USD/INR seeks a new all-time high
The Indian Rupee trades on a weaker note on the day. The USD/INR pair maintains a constructive outlook on the daily chart as the price is above the key 100-day Exponential Moving Average (EMA). The upward momentum is supported by the 14-day Relative Strength Index (RSI), which is located above the midline near 63.20, suggesting that the support is likely to hold rather than break.
The 87.00 psychological mark acts as a first upside barrier for the pair. Sustained gains above this level could see a run to 87.50.
On the other hand, the initial support level emerges at 86.51, the low of January 31. A decisive break below this level could expose 86.31, the low of January 28.
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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