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USD/INR gathers strength as foreign outflows weigh on Indian Rupee

  • The Indian Rupee weakens in Tuesday’s early European session. 
  • Significant foreign institutional investor (FII) outflows and higher US bond yields undermine the INR. 
  • The RBI’s FX intervention might help limit the INR’s losses. 

The Indian Rupee (INR) softens on Tuesday, pressured by sustained foreign outflows from domestic stocks and the rising US bond yields on the back of rising odds of Donald Trump winning the US presidential election. However, the fall in crude oil prices could provide some support to the local currency. The significant depreciation of the INR might be limited as the Reserve Bank of India (RBI) is likely to sell the USD via public sector banks to support the local currency.

Traders will closely monitor the key US economic data released this week, including the advanced US Gross Domestic Product (GDP) Annualized for the third quarter (Q3), the Personal Consumption Expenditures (PCE) Price Index for September and the highly anticipated US Nonfarm Payrolls (NFP). 

Daily Digest Market Movers: Indian Rupee remains weak amid multiple headwinds

  • “In the run-up to and immediate aftermath of U.S. elections, RBI’s aim will be to curb volatility in the rupee,” said A Prasanna, head of research at ICICI Securities Primary Dealership.
  • Foreign investors have withdrawn $10 billion from India’s equity and debt markets in October, the heaviest month of selling this year.
  • Nomura said on Monday that the Indian economy has entered a phase of “cyclical growth slowdown” and the RBI’s estimate of 7.2% GDP expansion is “overly optimistic.” 
  • The Indian economy is projected to expand between 6.5% and 7.0% in the current financial year, the Department of Economic Affairs stated in its monthly bulletin.
  • According to the CME FedWatch tool, traders have priced in nearly 96.8% odds of a usual size rate cut of 25 basis points (bps) in November and expect a similar move in the December meeting.

Technical Analysis: USD/INR’s constructive outlook prevails in the longer term

The Indian Rupee trades softer on the day. Technically, the USD/INR pair keeps the bullish vibe above the key 100-day Exponential Moving Average (EMA) on the daily chart. The upward momentum is supported by the 14-day Relative Strength Index (RSI), which stands above the midline near 60.15, indicating the support is likely to hold rather than break. 

Bullish candlesticks and sustained trading above the upper boundary of the ascending trend channel of 84.22 could set USD/INR to 84.50, en route to the 85.00 psychological level. 

On the downside, consistent trades under the lower limit of the trend channel near 84.05 could see a drop to 83.76, the 100-day EMA. 

RBI FAQs

The role of the Reserve Bank of India (RBI), in its own words, is “..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.

The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.

Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.