USD/INR recovers on persistent US Dollar demand, potential upside seems limited
- The Indian Rupee edges lower in Wednesday’s Asian session.
- Persistent USD demand from importers weighs on the INR, while lower crude oil prices might limit its losses.
- Advanced August PMI data from India and the US will be released on Thursday.
The Indian Rupee (INR) weakens on Wednesday and remains the worst-performing Asian currency in August due to trade deficits and persistent USD demand from importers. Any significant weakening of INR is likely to be limited amid the possible intervention from the Reserve Bank of India (RBI) that might sell USD to prevent local currency from breaching the critical 84.00 mark. Additionally, the extended fall in crude oil prices might support the local currency in the near term.
Traders will monitor the preliminary of the Indian August HSBC Purchasing Managers Index (PMI) on Thursday for fresh impetus. The highlight this week will be Federal Reserve (Fed) Chair Jerome Powell at Jackson Hole on Friday. There is growing speculation that Powell will signal a potential interest rate cut in this event, which could exert some selling pressure on the Greenback.
Daily Digest Market Movers: Indian Rupee remains sensitive to global factors
- MUFG Bank analysts said in a note that “Asian currencies have continued to strengthen against the US dollar on the back of broad U.S. dollar weakness and risk-on sentiment.”
- Foreign investors have pulled out about $2.5 billion from Indian shares in August, according to stock depository data.
- India’s Exports declined 6% in the current fiscal year through July compared to the same period in the previous year. In FY24, foreign direct investment in India dropped by 3.5%.
- Fed Governor Michelle Bowman stated on Tuesday that she will remain cautious in her approach to any change in the policy stance. She added that overreacting to any single data point could jeopardize the progress already made.
- Markets are pricing in about a 67.5% chance of the Fed cutting interest rates by 25 basis points (bps) in September, according to the CME FedWatch Tool.
Technical Analysis: USD/INR holds a positive stance in the longer term
Indian Rupee trades on a stronger note on the day. The positive outlook of the USD/INR pair remains in play as the price remains above the key 100-day Exponential Moving Average (EMA) on the daily chart. However, some selling pressure below the 11-week-old uptrend line in the previous sessions and the bearish 14-day Relative Strength Index (RSI) below the 50 midline indicate that further downside cannot be ruled out.
The key upside barrier for USD/INR appears near the 83.90-84.00 zone, the uptrend line and the psychological level. A break above the mentioned level could see a rally to the record high of 84.24 en route to 84.50.
In the bearish event, the initial target could be 83.70, the low of August 1. Further south, the next cushion level emerges near the 100-day EMA at 83.55, followed by 83.36, the low of June 28.
US Dollar price in the last 7 days
The table below shows the percentage change of US Dollar (USD) against listed major currencies in the last 7 days. US Dollar was the weakest against the Australian Dollar.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -1.11% | -1.25% | -0.68% | -1.62% | -1.06% | -1.22% | -1.33% | |
| EUR | 1.10% | -0.14% | 0.43% | -0.53% | 0.07% | -0.10% | -0.19% | |
| GBP | 1.23% | 0.15% | 0.57% | -0.39% | 0.22% | 0.04% | -0.06% | |
| CAD | 0.68% | -0.43% | -0.57% | -0.96% | -0.34% | -0.53% | -0.63% | |
| AUD | 1.63% | 0.51% | 0.37% | 0.93% | 0.56% | 0.40% | 0.29% | |
| JPY | 1.03% | -0.07% | -0.25% | 0.33% | -0.61% | -0.19% | -0.29% | |
| NZD | 1.21% | 0.10% | -0.04% | 0.53% | -0.43% | 0.19% | -0.10% | |
| CHF | 1.30% | 0.22% | 0.08% | 0.64% | -0.29% | 0.26% | 0.11% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
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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