The Indian Rupee (INR) opens on a slightly positive note against the US Dollar (USD) on Thursday after Indian markets remained closed on Wednesday on the occasion of Prakash Gurpurb Sri Guru Nanak Dev.
The USD/INR drops to near 88.60 as the Indian Rupee gains on hopes that the Reserve Bank of India (RBI) would continue to intervene in both local spot and offshore markets to support the currency from extending its losses against the US Dollar beyond the all-time high around 89.10.
A report from Reuters showed that the RBI intervened on Tuesday, both in the NDF market before the local open and in the onshore spot market, reinforcing its intent to prevent the rupee from weakening further.
Meanwhile, the outlook of the Indian Rupee remains uncertain as overseas investors continue to pare their stake in the Indian stock market due to uncertainty over the trade deal between the United States (US) and India.
Foreign Institutional Investors (FIIs) have started the November series with selling in the Indian equity market. In the two trading days of November, FIIs have turned out to be net sellers, selling cumulatively Rs. 2,950.79 crore worth of shares.
Daily digest market movers: US Dollar Index corrects after upbeat US data
- A cautious opening by the USD/INR is also driven by a slight pullback in the US Dollar. The US currency retraces after posting a fresh five-month high on Wednesday, following the US data releases.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally lower to near 100.05 after correcting from its immediate highs of 100.35.
- On Wednesday, the US ADP Employment Change and ISM Services Purchasing Managers’ Index (PMI) data for October showed better-than-projected numbers. In October, the US private sector created 42K fresh jobs, higher than estimates of 25K. In September, employers laid off 29K workers.
- Meanwhile, the Services PMI came in at 52.4, beating estimates of 50.8 and the prior reading of 50.0. Upbeat US ADP Employment and Services PMI data have weighed further on market expectations for more interest rate cuts by the Federal Reserve (Fed) this year.
- The CME FedWatch tool shows that the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has eased to 62.5% from 94.4% seen before the monetary policy announcement on October 29.
- Fed dovish speculation for the December policy meeting started receding after Chairman Jerome Powell commented in the press conference following the monetary policy announcement that the December rate cut is “far from a foregone conclusion”.
- Meanwhile, Fed Governor Stephen Miran has reiterated the need for more interest rate cuts amid labor market risks. “I think policy is too restrictive and that we’re too far above where neutral rates would be,” Miran said in an interview on Yahoo Finance’s website, Reuters reported.
Technical Analysis: USD/INR holds 20-day EMA
USD/INR drops to near 88.60 on Wednesday. The pair continues to find support near the 20-day Exponential Moving Average (EMA), which trades around 88.58.
The 14-day Relative Strength Index (RSI) falls after failing to break above 60.00, suggesting selling pressure at higher levels.
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.
