USD/INR softens ahead of RBI rate decision

VaselineOctober 9, 2024

0 3 minutes read

The Indian rupee gains ground in the Asian session on Wednesday.
Low crude oil prices and potential foreign exchange intervention by RBI support the INR.
Investors await the RBI’s interest rate decision on Wednesday ahead of the FOMC minutes.

The Indian Rupee (INR) gained strength on Wednesday, supported by a drop in crude oil prices, stronger Asian currencies and likely foreign exchange intervention by the Reserve Bank of India (RBI). However, outflows from local stocks and renewed demand for US dollars (USD) could limit the upside for the local currency.

Investors will closely monitor the interest rate decision from the Reserve Bank of India (RBI) on Wednesday, which is likely to keep its policy rate unchanged but may adopt a “neutral” stance. On the US agenda, the minutes of the September meeting of the Federal Reserve (Fed) will be in focus.

Daily Digest Market Movers: Indian rupee higher on likely RBI intervention

“A rise in oil prices coinciding with dollar strength has raised inflation risks in India and put pressure on the rupee, forcing the RBI to undertake significant foreign exchange intervention in recent days,” JP Morgan analysts observed on Tuesday.
India’s foreign reserves rose to a record $704.89 billion as of September 27, an increase of $12.5 billion, according to the RBI.
Federal Reserve Vice Chairman Philip Jefferson said on Tuesday that the risks to the central bank’s employment and inflation goals are now closer to equal, according to Bloomberg.
Boston Fed President Susan Collins noted on Tuesday that with inflation trends weaker, it is highly likely that the Fed will be able to cut interest rates further.
Markets estimated a nearly 87 percent chance of the Fed cutting interest rates by 25 basis points (bps) in November, up from 31.1 percent last week, according to CME’s FedWatch tool.

Technical Analysis: USD/INR bullish outlook prevails

The Indian Rupee is trading firmer today. The USD/INR pair is maintaining bullish vibration above the downtrend line and 100-day exponential moving average (EMA) on daily time frame. The path of least resistance appears to the upside as the 14-day Relative Strength Index (RSI) sits above the median near 55.70.

The key resistance level for USD/INR appears near the upper boundary of the rectangle and a psychological mark of 84.00. Further north, the next upside barrier is seen at the all-time high of 84.15, followed by 84.50.

On the other hand, the resistance level turned support at 83.90 acts as an initial support level for USD/INR. Extended losses could expose the 100-day EMA at 83.67. Any further selling could see a dip to 83.00, representing the round mark and May 24 low.

Frequently Asked Questions about the Indian Rupee

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of crude oil (the country is heavily dependent on imported oil), the value of the US dollar – most trade is done in USD – and the level of foreign investment are all influential. Direct intervention of the Reserve Bank of India (RBI) in the foreign exchange markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are other major influencing factors on the rupee.

The Reserve Bank of India (RBI) actively intervenes in the foreign exchange markets to maintain a stable exchange rate to help facilitate trade. In addition, the RBI is trying to maintain the inflation rate at the target of 4% by adjusting interest rates. Higher interest rates usually strengthen the rupee. This is due to the role of “carry trade” where investors borrow in countries with lower interest rates so that they place their money in countries that offer relatively higher interest rates and profit from the difference.

Macroeconomic factors that influence the value of the rupee include inflation, interest rates, the rate of economic growth (GDP), trade balance and foreign investment flows. A higher growth rate can lead to more investment abroad, increasing demand for the rupee. A less negative trade balance will ultimately lead to a stronger rupee. Higher interest rates, especially real rates (interest rates minus inflation) are also positive for the rupee. A risk-on environment may lead to higher foreign direct and indirect investment (FDI and FII) inflows, which also benefits the rupee.

Higher inflation, especially if it is comparatively higher than India’s, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, resulting in more rupees being sold to buy foreign imports, which is negative for the rupee. 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 for lower inflation.

VaselineOctober 9, 2024

0 3 minutes read

Daily Digest Market Movers: Indian rupee higher on likely RBI intervention

Technical Analysis: USD/INR bullish outlook prevails

Frequently Asked Questions about the Indian Rupee

Vaseline

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