The Indian Rupee (INR) opens on a flat note against the US Dollar (USD) near its over two-week high around 88.95 at the start of the new month on Monday. The USD/INR pair aims to extend its six-day winning streak as the Indian Rupee (INR) continues to underperform due to Foreign Institutional Investors (FIIs) selling in the Indian stock market, and the US Dollar (USD) extends its rally amid escalating doubts over further interest rate cuts by the Federal Reserve (Fed) for the December policy meeting.
With the foreign outflow of Rs. 2,346.89 crores worth of shares from the Indian equity market in October, FIIs have turned out to be net sellers for the fourth month in a row. However, the pace of FIIs selling appears to have slowed down significantly. The amount of stake pared by overseas investors in the Indian equity market in October is significantly lower than the average selling of Rs. 43,290.32 crores seen in the July-September period.
FIIs have been keeping a distance from the Indian stock market amid the delay in a breakthrough in trade talks between the United States (US) and India. Negotiators from both nations have been signaling that they are close to striking a trade agreement, but have not yet reached a consensus.
Meanwhile, a report from Reuters has shown that the odds of the Reserve Bank of India (RBI) intervening in the currency market are high as the USD/INR is approaching its all-time high of 89.12 posted in late September.
Daily digest market movers: Easing Fed dovish bets support US Dollar
- The US Dollar has been outperforming since the monetary policy announcement by the Federal Reserve (Fed) on Wednesday. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near a fresh three-month high around 99.85.
- In Wednesday’s monetary policy announcement, the Fed reduced interest rates for the second straight meeting by 25 basis points (bps) to 3.75%-4.00%, but Chair Jerome Powell argued against cutting interest rates again in the December meeting.
- Fed’s Powell stated that the December cut is “far from assured”. Powell clarified that there were “strongly different views” in the meeting, and the takeaway is that “we haven’t made a decision about December”, Bloomberg reported.
- Since then, traders have trimmed bets supporting more interest rate cuts by the Fed for the December policy meeting. According to the CME FedWatch tool, the probability of the Fed to cut interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has eased to 69.3% from 91.7% seen a week ago.
- Meanwhile, a few Federal Open Market Committee (FOMC) members have also argued against reducing interest rates further, citing that inflationary pressures are well above the central bank’s 2% target.
- “Given the move that we just made, I think we’re right around my estimate of neutral: I think we’re barely restrictive if at all,” Cleveland Fed President Beth Hammack said on Friday. He added, “I do think we need to maintain some amount of restriction to help bring inflation back down to target,” Reuters reported.
- On the contrary, Fed Governor Christopher Waller has stressed on reducing interest rates further, in an interview on Fox Business Network, citing labor market risks. “The biggest concern we have right now is the labor market, while expressing confidence that price pressures are going to come back down.”
Technical Analysis: USD/INR stays above 20-day EMA
-1762145613991-1762145613994.png&w=1536&q=95)
USD/INR trades firmly near over two-week high around 88.95 at the start of the week. The near-term trend of the pair remains bullish as it trades above the 20-day Exponential Moving Average (EMA), which trades around 88.54.
The 14-day Relative Strength Index (RSI) breaks above 60.00. A fresh bullish momentum would emerge if the RSI sustains above that level.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the all-time high of 89.12 will be a key barrier.
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.
