- The Indian Rupee trades on a firmer note in Thursday’s early European session.
- Rising US Dollar demand and continued capital outflows could undermine the INR, but RBI intervention might cap its downside.
- The estimate of the US Q4 GDP report will take center stage later on Thursday.
The Indian Rupee (INR) gains ground on Thursday. USD/INR tumbles from 87.25 to 87.0550 in a space of two minutes on interbank order matching system amid likely intervention from the Reserve Bank of India (RBI). Nonetheless, the local currency remains fragile due to month-end US Dollar (USD) demand by importers. Additionally, capital outflows amid uncertainty over US trade tariffs might contribute to the INR’s downside.
Looking ahead, traders will keep an eye on the estimate of US Gross Domestic Product (GDP) for the fourth quarter (Q4), along with the weekly Initial Jobless Claims, which are due later on Thursday. Fedspeak will be in focus as it might offer some hints about the interest rate path in the United States. The Federal Reserve’s (Fed) Michelle Bowman, Beth Hammack and Patrick Harker are scheduled to speak.
Indian Rupee rebounds despite USD demand and foreign outflows
- RBI intervened at near 87.40 and kept selling aggressively, hitting USD/INR bids at all levels, traders said.
- Another trader said that only RBI can do this, and this again is them warning the markets,
- India’s battered benchmark stock indices are set for a slow and partial recovery this year from their biggest straight monthly loss in almost three decades, according to a Reuters poll of equity analysts who were far more pessimistic than three months ago.
- “Rupee traded very weak as FII sell-off continued and crude oil prices remained elevated amid US tariffs on Iran, which pushed oil demand higher. The dollar index at 106.65 also added to the pressure on the rupee,” said Jateen Trivedi, Research Analyst at LKP Securities.
- Late Wednesday, US President Donald Trump reiterated his insistence on 25% tariffs on Canada and Mexico, as well as adding the European Union (EU) to the list of countries from which he will penalize US consumers for importing.
- New Home Sales in the US fell by 10.5% MoM to 657,000 units in January from 734,000 units (revised from 698,000) in the previous reading, according to the Commerce Department’s Census Bureau on Wednesday. This figure came in weaker than the 680,000 units expected.
- Atlanta Fed President Raphael Bostic said late Wednesday that the Fed should hold interest rates where they are, at a level that continues to put downward pressure on inflation, per Bloomberg.
- Richmond Fed President Thomas Barkin noted that he will follow a wait-and-see approach regarding central bank interest rate policy until it is clear inflation is returning to the Fed’s 2% target.
USD/INR’s outlook remains bullish despite consolidation in the shorter term
The Indian Rupee trades firmer on the day. The USD/INR maintains the constructive view on the daily chart, characterized by the price holding above the key 100-day Exponential Moving Average (EMA). The upward momentum is reinforced by the 14-day Relative Strength Index (RSI), which stands above the midline near 59.50, suggesting that further upside looks favorable.
In the bullish case, the first upside target to watch is 87.25, the high of February 25. Extended gains above this level could push the price to an all-time high near 88.00. The next hurdle is seen at 88.50.
On the flip side, the low of February 21 at 86.48 acts as an initial support level for the pair. Further south, the next contention level is located at 86.14, the low of January 27, followed by 85.65, the low of January 7.
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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