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USD/INR retreats ahead of Fed rate decision

  • The Indian Rupee gains ground in Thursday’s Asian session. 
  • The strengthening of the USD and higher bond yields might cap the INR’s upside. 
  • The US Fed interest rate decision will take center stage on Thursday. 

The Indian Rupee (INR) rebounds on Thursday. Nonetheless, the upside of the local currency might be limited amid a rally in the US Dollar (USD) and higher bond yields, which are bolstered by Donald Trump’s victory in the US presidential elections. Market participants expect the INR to trade in the range on Thursday as the Reserve Bank of India (RBI) is expected to intervene in the market by selling the USD to avoid excess volatility. 

Meanwhile, persistent foreign fund outflows amid bond and foreign exchange volatility could exert some selling pressure on the INR in the near term. Investors will closely monitor the US Federal Reserve (Fed) meeting on Thursday, which is expected to cut interest rates by 25 basis points (bps). Also, the US weekly Initial Jobless Claims will be released.  

Daily Digest Market Movers: Indian Rupee edges higher, but potential upside seems limited

  • “The rupee was trading in a narrow range for the past two years, and was a bit overvalued too. But now given that the dollar index is rising and other Asian currencies are depreciating, there will be an impact on the rupee too,” noted Gopal Tripathi, head of treasury and capital markets, Jana Small Finance Bank.
  • The HSBC India Services PMI rose to 58.5 in October from 57.7 in September, exceeding a preliminary estimate of 58.3.
  • “During October, the Indian services sector experienced strong expansions in output and consumer demand, as well as job creation,” noted Pranjul Bhandari, chief India economist at HSBC.
  • A narrow majority of economists in a Reuters poll expected the RBI to cut rates by 25 bps to 6.25% in December. 
  • Financial markets are now pricing in nearly a 98% possibility of a quarter point reduction and near 70% odds of a similar-sized move in December, according to CME’s FedWatch tool. However, traders have begun to trim bets for the number of rate cuts expected next year.  

Technical Analysis: USD/INR’s constructive outlook remains unchanged, eyes on overbought RSI 

The Indian Rupee recovers on the day. Technically, the positive view of the USD/INR pair prevails as the pair holds above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. However, the 14-day Relative Strength Index (RSI) stands above the midline near 73.45, indicating the overbought RSI condition. This suggests that further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.

The crucial resistance level for USD/INR emerges near the upper boundary of the ascending trend channel at 84.30. The additional upside filter to watch is 84.50, followed by the 85.00 psychological level.

On the flip side, the lower limit of the trend channel and the high of October 11 in the 84.05-84.10 zone act as an initial support level for the pair. A breach of this level could pave the way to 83.80, the 100-day EMA. Extended losses could see a drop to 83.46, the low of September 24. 

Indian Rupee FAQs

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.