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USD/INR weakens on surging foreign equity inflows

  • The Indian Rupee gains ground in Friday’s early European session. 
  • Renewed foreign inflows into local equities support the INR, but month-end US Dollar demand might cap its upside.
  • The US February PCE inflation data will take center stage later on Friday. 

The Indian Rupee (INR) gathers strength on Friday, bolstered by positive domestic markets and foreign fund inflows. However, month-end US Dollar (USD) demand from importers might cap the upside for the Indian currency. US President Donald Trump late on Wednesday announced a 25% tariff on automotive imports, set to take effect on April 2. This, in turn, might also lift the Greenback and undermine the Indian currency. Rising crude oil prices could drag the INR lower as India is the world’s third-largest oil consumer.   

Investors will keep an eye on the US February Personal Consumption Expenditures (PCE) data, which is due later on Friday. This report could offer some hints about the trajectory for further rate cuts after the Federal Reserve’s (Fed) decision last week to hold its benchmark interest rate steady.

Indian Rupee drifts higher amid foreign equity inflows

  • The Indian economy is estimated to achieve a growth of 6.5% in FY25 despite considerable external headwinds, according to the Department of Economic Affairs (DEA), Ministry of Finance.
  • Trump’s threat to impose 25% tariffs on all goods entering the US from countries importing Venezuelan gas or oil, brandished on Monday, could have disastrous consequences for the Indian economy, per Le Monde. 
  • Trump said that tariffs will likely be more “lenient than reciprocal,” as next week’s tariff deadline looms for a number of levies to go into effect.
  • The US economy expanded at an annual 2.4% pace in the final three months of 2024, the third release of the figures from the Bureau of Economic Analysis showed Thursday.  This figure came in slightly better than the previous estimate of fourth-quarter growth. 

USD/INR paints a negative picture under the 100-day EMA

The Indian Rupee trades in positive territory on the day. The negative view of the USD/INR pair remains in play, with the price being capped below the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The downward momentum is reinforced by the 14-day Relative Strength Index (RSI), which stands below the midline near 31.0, suggesting that further downside looks favorable. 

The first downside target for USD/INR is located at 85.56, the low of March 26. If bearish momentum builds below this level, it could trigger more selling and drag the pair down toward 84.84, the low of December 19, followed by 84.22, the low of November 25, 2024. 

On the other hand, the crucial upside barrier to watch is in the 85.90-86.00 zone, representing the 100-day EMA and the psychological level. A strong move above the mentioned level might even pave the way for a run at 86.48, the low of February 21, en route to 87.00, the round figure. 

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.