- Indian Rupee softens in Friday’s early European session.
- Likely foreign outflows and a weaker US Dollar weigh on the INR.
- Traders brace for Fedspeak later on Friday.
The Indian Rupee (INR) trades in negative territory on Friday. Likely foreign outflows from domestic equities and higher crude oil prices undermine the Indian currency. Furthermore, consumer inflation in India fell more than expected to a near six-year low in April, strengthening bets that the Reserve Bank of India (RBI) is due to extend its rate-cutting cycle.
However, a broader weakness in the US Dollar and the progress of a multi-phase trade deal between the US and India could provide some support for the local currency in the near term. Traders will keep an eye on the speeches from the Federal Reserve (Fed) officials later on Friday, including Alberto Musalem, Jeff Schmid and Lisa Cook.
Indian Rupee drifts lower amid global cues
- The HSBC India Manufacturing Purchasing Managers Index (PMI) rose to 58.3 in May from the previous reading of 58.2. This figure came in stronger than the 58.0 expected.
- Indian Services PMI improved to 61.2 in April from 58.7 in March. Composite PMI rose to 61.2 in April versus 59.7 prior.
- “India’s flash PMI indicates another month of strong economic performance. Growth in production and new orders among manufacturing firms remains robust, despite a marginal cooling from the rates of increase observed in April,” said Pranjul Bhandari, Chief India Economist at HSBC.
- India’s Commerce and Industry Minister Piyush Goyal stated that India and the US may finalise the first phase of the India-US trade deal before July.
- The US Global S&P Composite PMI rose to 52.1 in May’s flash estimate from 50.6 in April. Meanwhile, the Manufacturing PMI improved to 52.3 in May from 50.2 in April, while the Services PMI rose to 52.3 from 50.8.
- The US Initial Jobless Claims for the week ending May 17 dropped to 227K, compared to the previous week of 229K, according to the US Department of Labor (DOL) on Thursday. This reading came in below the market consensus of 230K. Continuing Jobless Claims went up 36K to reach 1.903M for the week ending May 10.
USD/INR resumes its upside above the 100-day EMA
The Indian Rupee trades on a weaker note on the day. The USD/INR pair crosses above the key 100-day Exponential Moving Average (EMA) on the daily timeframe, indicating that the pair could resume its upside. The path of least resistance is to the upside as the 14-day Relative Strength Index (RSI) remains above the midline
On the bright side, the first upside barrier is seen at 86.10, the high of May 22. Any follow-through buying could see a rally to 86.61, the high of April 10.
The first downside target to watch for USD/INR is 85.35, the low of May 20. Failure to stay above the mentioned level might signal that bears are still in control and drag the price lower to 84.84, the low of May 12. A breach of this level could seem to drop to 84.15, the lower limit of the trend channel.
RBI FAQs
The role of the Reserve Bank of India (RBI), in its own words, is “..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.
The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.