The Indian Rupee (INR) trades lower to near 88.90 against the US Dollar (USD) on Tuesday, tracking overnight gains in the United States (US) currency, which came on the back of receding trade tensions between Washington and China. The Indian currency is expected to remain under pressure amid firming expectations that the Reserve Bank of India (RBI) could cut the Repo Rate further in the last policy meeting of the year in December.
RBI’s dovish bets have accelerated due to escalating fears of retail inflation undershooting the central bank’s tolerance band of 2%-6%. This is the second time in the last three months when the retail inflation has grown at an annual pace lower than 2%.
On Monday, the Ministry of Statistics and Program Implementation reported that the retail inflation grew by 1.54% in September, the slowest growth in price pressures seen since June 2017. Economists had anticipated the inflation data to come in at 1.7%, lower than 2.07% in August. Additionally, the Wholesale Price Index (WPI) Inflation has also come in lower at 0.13% against estimates of 0.5% and the prior reading of 0.52%.
This year, the RBI has already reduced its Repo Rate by 100 basis points (bps) to 5.5%. In its June policy, the Indian central bank announced a 50-basis-point reduction in the repo rate, citing that it is front-loading rate cuts to boost the economy.
Meanwhile, trade tensions between India and the US over New Delhi buying oil from Russia have been a major drag on the Indian Rupee. This has also kept overseas investors away from the Indian stock markets. However, a slowdown in the pace of foreign investors paring stake in Indian equities has been observed in the past few trading days.
From October 7-10, FIIs turned out to be net buyers in Indian stock markets, investing Rs. 3,289.30 crores. However, they sold a stake worth Rs. 240.10 crores on Monday.
Daily digest market movers: Receding US-China trade tensions improves US Dollar’s appeal
- The US Dollar trades higher against its peers as the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, has extended its Monday gains near 99.50.
- The Greenback gains as trade tensions between the US and China began to wane after Beijing confirmed that high-level talks between the nations are still going on, but accused Washington of adopting discriminatory policies and abusing export controls.
- Meanwhile, US Treasury Secretary Scott Bessent has confirmed a meeting between President Donald Trump and Chinese leader Xi Jinping in South Korea in late October, with the aim of resolving issues regarding US chip technologies and rare earth controls.
- “President Trump said that the tariffs would not go into effect until November 1. He will be meeting with Party Chair Xi in Korea. I believe that meeting will still be on,” Bessent said in an interview with Fox Business Network on Monday, Reuters reported.
- On the monetary policy front, investors await the speech from Federal Reserve (Fed) Chair Jerome Powell at the National Association for Business Economics (NABE) Annual Meeting in Philadelphia at 16:20 GMT. Investors would like to know the pace at which the Fed will continue loosening its monetary policy in the near term.
- According to the CME FedWatch tool, traders see a 94% that the Fed will reduce interest rates by 50 basis points (bps) to 3.50%-3.75% in the remaining year.
Technical Analysis: USD/INR aims to extend upside towards 90.00
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The Indian Rupee continues to hold its all-time low around 89.10 against the US Dollar for almost 20 days. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 88.71.
However, the 14-day Relative Strength Index (RSI) falls below the 60.00-80.00 range, suggesting that the bullish momentum is over for now.
Looking down, the pair could slide to near the September 12 high of 88.57 and the 20-day EMA.
On the upside, the pair could extend the rally towards the round figure of 90.00 if it breaks above the current all-time high of 89.12.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
