USD/INR weakens as traders await Indian/US CPI inflation releases
- The Indian Rupee strengthens in Wednesday’s Asian session.
- The likely RBI intervention and softer US Dollar underpin the INR.
- The Indian and US CPI inflation reports will take center stage later on Wednesday.
The Indian Rupee (INR) rebounds on Wednesday. The potential foreign exchange intervention from the Reserve Bank of India (RBI) and strong Asian currencies, especially the offshore Chinese Yuan provide some support to the Indian currency.
Nonetheless, the unabated outflows of foreign funds into Indian equities could exert some selling pressure on the local currency. Foreign investors have withdrawn almost $15 billion from Indian shares so far this year, putting outflows on track to surpass the record $17 billion registered in 2022.
Additionally, a recovery in crude oil prices could undermine the Indian Rupee. It’s worth noting that India is the world's third-largest oil consumer and higher crude oil prices tend to have a negative impact on the INR value. Looking ahead, traders will closely monitor the Indian and US Consumer Price Index (CPI) inflation reports for February, which are due later on Wednesday.
Indian Rupee gains ground amid a weaker US Dollar
- RBI was the net seller of over $36 billion between June and December to support the Indian Rupee, according to government data on Tuesday.
- Trump reversed his decision to double tariffs on Canadian steel and aluminum to 50%, which he announced late Tuesday.
- The US JOLTS report showed that job openings rose to 7.740 million in January, up from 7.508 million, surpassing expectations of 7.63 million.
- Financial markets have priced in 75 basis points (bps) of rate cuts from the Fed this year, LSEG data show, with a rate cut fully priced in for June.
USD/INR maintains a constructive outlook despite consolidation in the near term
The Indian Rupee trades on a stronger note on the day. The bullish trend of the USD/INR pair remains in play as the price is above the key 100-day Exponential Moving Average (EMA) on the daily chart. The upward momentum is reinforced by the 14-day Relative Strength Index (RSI), which is located above the midline near 56.15.
The immediate resistance level is seen at 87.53, the high of February 28. Sustained buying above this level could pave the way to an all-time high near 88.00, en route to 88.50.
On the flip side, the low of March 6 at 86.86 acts as the first downside target for the pair. Any follow-through selling could open the door for a deeper drop toward 86.48, the low of February 21, followed by 86.14, the low of January 27.
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.