USD/INR remains strong after Fed leaves interest rates unchanged
- The Indian Rupee softens in Thursday’s Asian session.
- A rebound in oil prices and the Fed’s hawkish stance drag the INR lower.
- Investors await the US weekly Initial Jobless Claims data, which is due later on Thursday.
The Indian Rupee (INR) trades in negative territory on Thursday. A rise in Crude Oil prices amid the ongoing geopolitical tensions in the Middle East weighs on the local currency as India is the world's third-largest oil consumer. Furthermore, the more hawkish stance from the US Federal Reserve (Fed) at its March meeting on Wednesday lifts the US Dollar (USD) and undermines the Indian currency.
However, India’s latest current account data, which showed a surplus in February, might help limit the INR’s losses. The Reserve Bank of India (RBI) has likely been "opportunistically" absorbing USD inflows over the past few sessions, probably to replenish the foreign exchange reserve expanded to support the INR over the past few months, according to reports. Looking ahead, the US weekly Initial Jobless Claims will be released later on Thursday, followed by the Philly Fed Manufacturing Index, Existing Home Sales, and the CB Leading Index.
Indian Rupee remains fragile amid multiple headwinds
- India's foreign exchange reserves have risen from $624 billion in January to $654 billion by early March, though they remain $50 billion below their peak in October.
- The Fed held rates steady at the 4.25%-4.50% range at the March meeting on Wednesday, as widely anticipated.
- Fed officials still see reducing borrowing costs by half a percentage point by the end of this year due to slowing economic growth and a downturn in inflation.
- Fed Chair Jerome Powell highlighted the high degree of uncertainty from US President Donald Trump’s significant policy changes, adding that the Fed officials can wait for more clarity on the impact of those policies on the economy before acting.
- Powell stated during a press conference, “Labor market conditions are solid, and inflation has moved closer to our 2% longer-run goal, though it remains somewhat elevated.”
USD/INR keeps the bullish vibe in the longer term
The Indian Rupee trades on a softer note on the day. In the longer term, the USD/INR pair maintains its constructive outlook on the daily timeframe. Nonetheless, in the near term, the pair has broken out of a symmetrical triangle, while the 14-day Relative Strength Index (RSI) stands below the midline near 37.00, suggesting that further downside looks favorable.
The 87.00 psychological level appears to be a tough nut to crack for USD/INR. A decisive break above this level could see a rally to 87.38, the high of March 11, en route to 87.53, the high of February 28.
On the downside, the crucial support level is located at 86.00, the round mark and the 100-day EMA. A breach of the mentioned level could attract some sellers and drag the pair lower to 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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