USD/INR extends rally as US Dollar bids spike
- The Indian Rupee tumbles in Monday’s Asian session.
- A firmer USD, Donald Trump's trade policies and India's economic challenges weigh on the INR.
- The possible RBI intervention might prevent the local currency from depreciating significantly.
The Indian Rupee (INR) remains under pressure on Monday after hitting a historic low of 81.00 in the previous session. The stronger US Dollar (USD) due to month-end demand, uncertainties from the incoming Donald Trump, and concerns about India's slowing growth and widening trade deficit create a tailwind for the pair.
The Reserve Bank of India's (RBI) intervention by selling the USD might help limit the local currency’s losses in the near term. However, the markets are likely to be muted as the year-end could keep it rangebound. Later on Monday, traders will keep an eye on India’s Fiscal Deficit, which is due on Monday. On Tuesday, the Indian Trade Deficit for the third quarter (Q3) and Infrastructure Output data for November will be released.
Indian Rupee faces challenges after reaching record lows
- "Rupee volatility seems to be back, and we should see bigger movements in the (USD/INR) currency pair as we move forward," noted Anil Bhansali, head of treasury at Finrex Treasury Advisors.
- "The excessive positions are being flushed out now that the RBI has intervened with intent," a currency dealer at a mid-sized private bank said.
- India's economy is estimated to grow at around 6.5% in fiscal year 2024/25, closer to the lower end of its 6.5%-7% projection, the government said on Thursday.
- India's economy is likely to expand at 6.5-6.8% this fiscal year and slightly higher between 6.7-7.3% in FY2026, boosted by domestic consumption, according to Deloitte Sunday.
USD/INR’s bullish outlook remains in play
The Indian Rupee trades on a weaker note on the day. According to the daily chart, the USD/INR pair holds above the key 100-day Exponential Moving Average (EMA), suggesting bulls still have control of the medium-term trend. Nonetheless, further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation as the 14-day Relative Strength Index (RSI) stands near 76.10, indicating an overbought condition.
If bulls manage to push above the ascending channel upper boundary at 85.35 and can sustain trade up there, that may attract technical buyers to 85.50, en route to the 86.00 psychological level.
If bearish momentum forms, we could see a move back toward the crucial support level in the 85.10-85.00 zone, where the lower boundary of the trend channel and the round mark meet. A breach of this level could see a drop to 84.30, the 100-day EMA.
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.