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USD/INR flat lines near all-time low ahead of Indian WPI inflation data

  • The Indian Rupee remains steady near a record low in Thursday’s Asian session. 
  • Equity outflows and persistent strength in the USD drag the INR lower. 
  • Investors await India’s October WPI Inflation on Thursday ahead of the US PPI data release. 

The Indian Rupee (INR) holds steady near its all-time low on Thursday. The continued withdrawal of foreign funds, sluggishness in domestic stock markets, and a rally in the US Dollar Index (DXY) exert some selling pressure on the local currency. 

Nonetheless, lower crude oil prices and the routine interventions by the Reserve Bank of India (RBI) might help limit the INR’s losses and keep volatility muted in the near term. Later on Thursday, investors will monitor India’s Wholesale Price Index (WPI) Inflation for October. On the US docket, the Producer Price Index (PPI) for October, weekly Initial Jobless Claims and Fedspeak will be the highlights later in the day. 

Indian Rupee remains weaker amid foreign fund outflows and a strong US Dollar

  • Overseas investors withdrew nearly $3 billion from Indian stocks in November, adding to the $11 billion of outflows in October. Indian equity indexes have fallen over 9% since their peak in late September.
  • The US Consumer Price Index (CPI) rose by 2.6% YoY in October, in line with expectations, according to the US Department of Labor Statistics on Wednesday.
  • The core CPI, which excludes the more volatile food and energy categories, climbed by 3.3% YoY in October, matching prior forecasts.
  • Kansas Fed President Jeffrey Schmid stated on Wednesday that the Fed’s interest-rate cuts to date acknowledge its growing confidence that inflation is headed down but gave no steer on how many more rate cuts he feels may be appropriate, per Reuters. 
  • St. Louis Fed President Alberto Musalem noted on Wednesday that sticky inflation figures make it difficult for the US central bank to continue to ease rates. 
  • Dallas Fed President Lorie Logan said on Wednesday that the central bank should move slowly with additional rate cuts to avoid unintentionally stoking inflation. 

USD/INR’s bullish outlook remains in play, but overbought conditions linger

The Indian Rupee trades flat on the day. The USD/INR pair holds above the key 100-day Exponential Moving Average (EMA) on the daily timeframe, suggesting the uptrend is more likely to resume than to reverse. However, further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation as the 14-day Relative Strength Index (RSI) exceeds 70, indicating an overbought condition.

The first upside barrier for USD/INR is seen at 84.50. Sustained trading above this level potentially takes the pair to the 85.00 psychological level and beyond.

On the flip side, the resistance-turned-support level at 84.32 acts as an initial support for the pair. A breach of the mentioned level could see a drop to the 84.05-84.10 region, representing the lower limit of the trend channel and the high of October 11. The next contention level to watch is 83.86, the 100-day EMA. A decisive break below this level could mark the start of a downtrend.

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.