- The Indian Rupee steadies in Tuesday’s Asian session.
- A weaker US Dollar and stronger Chinese Yuan could support the INR, but RBI rate cut bets might cap its upside.
- The US Conference Board’s Consumer Confidence report is due later on Tuesday.
The Indian Rupee (INR) flat lines on Tuesday after hitting a two-week high in the previous session. A broader gain in the Asian currencies on account of a weak US Dollar (USD) could provide some support to the Indian currency. Additionally, a decline in crude oil prices might contribute to the INR’s upside. 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 INR value.
Nonetheless, expectations of lower interest rates by the Reserve Bank of India (RBI) might weigh on the local currency. Traders brace for the US Conference Board’s Consumer Confidence report, which is due later on Tuesday. Also, Durable Goods Orders and the Dallas Fed Manufacturing Index will be released. The Minutes of the Federal Open Market Committee (FOMC) will be the highlight later on Wednesday.
Indian Rupee holds steady amid weakening of the US Dollar
- “It’s a very EM positive environment, and I don’t see any reason why that will stop in the near term,” said Brad Bechtel, global head of foreign exchange at Jefferies. Bechtel emphasized that the US Dollar (USD) could face steeper losses if China allows the Yuan to start moving substantially higher.
- The Monetary Policy Committee (MPC) of the RBI is likely to cut the repo rate by 25 basis points (bps) at the June meeting, according to Moneycontrol’s poll of economists and bank treasury heads.
- NITI Aayog Chief Executive Officer (CEO) BVR Subrahmanyam said that India has surpassed Japan to become the world’s fourth-largest economy, citing data from the International Monetary Fund (IMF).
- According to the CME FedWatch tool, the chances of an interest rate cut by the Federal Reserve (Fed) in June’s meeting are only at a low of 5.6%.
USD/INR retains the negative bias in the longer term
The Indian Rupee trades on a flat note on the day. The bearish outlook of the USD/INR pair remains in place as the price is below the key 100-day Exponential Moving Average (EMA) on the daily chart. Furthermore, downward momentum is reinforced by the 14-day Relative Strength Index (RSI), which stands below the midline near 45.00. This suggests that further downside looks favorable in the near term.
The first support level for USD/INR is located at 84.78, the low of May 26. Any follow-through selling below this level could set off a drop to 84.61, the low of May 12. The additional downside filter to watch is 84.05, the lower limit of the trend channel.
In the bullish case, the 100-day EMA at 85.55 acts as an immediate resistance level for the pair. Sustained trading above the mentioned level possibly lifts USD/INR up to 85.75, the upper boundary of the trend channel. Further north, the next hurdle is seen at 85.10, the high of May 22.
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.