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USD/INR slumps as lower crude oil prices support Indian Rupee

  • Indian Rupee rebounds in Friday’s Asian session. 
  • Lower crude oil prices underpin the INR, but persistent interbank USD demand and foreign fund outflows might cap its upside. 
  • Traders await the US housing data and the preliminary University of Michigan Consumer Sentiment Index report.

The Indian Rupee (INR) recovers some lost ground, snapping the three-day losing streak on Friday. A fall in crude oil prices amid reports that the US and Iran are getting closer to a deal on the country’s nuclear program provides some support to the INR. It’s worth noting that India is the world’s third-largest oil consumer, and lower crude oil prices tend to have a positive impact on the INR value.

However, the renewed US Dollar (USD) demand from importers and continued foreign fund outflows could weigh on the Indian currency. Later on Friday, traders brace for the US Building Permits, Housing Starts and the preliminary University of Michigan Consumer Sentiment Index. The Federal Reserve (Fed) official Thomas Barkin is scheduled to speak later in the same day. 

Indian Rupee gathers strength on softer crude prices

  • The dollar-rupee overnight swap rate also dipped, pointing to heightened demand for cash dollars, which typically indicates a pickup in outflows, a trader said. 
  • India has sought to clinch a trade deal with the US within the 90-day pause announced by Trump on April 9 on tariff hikes for major trading partners.
  • The US Producer Price Index (PPI) rose 2.4% YoY in April, following the 2.7% increase in March, according to the Bureau of Labor Statistics on Thursday. This figure came in below the market expectation of 2.5%.
  • The US Initial Jobless Claims for the week ending May 10 came in at 229K, compared to the previous week’s revised tally of 229K (revised from 228K), according to the US Department of Labor (DOL) on Thursday. This reading matched initial estimates. 
  • Continuing Jobless Claims went up by 9K to reach 1.881M for the week ending May 3.

USD/INR holds a bearish tone under the 100-day EMA

The Indian Rupee trades firmer on the day. The negative view of the USD/INR pair remains in play, characterized by the price being above the key 100-day Exponential Moving Average (EMA) on the daily chart. Nonetheless, the 14-day Relative Strength Index (RSI) hovers around the midline, suggesting further consolidation or temporary recovery cannot be ruled out.

The initial support level for USD/INR emerges at 84.95, the low of April 28. A clear break below this level could drag the pair lower to 84.61, the low of May 12, followed by 84.12, the low of May 5.

On the bright side, the first upside barrier is seen at 85.60, the 100-day EMA. Green candlesticks and a clear bounce above the mentioned level could see a rally to the 86.00-86.05 zone, which marks both a round figure and the upper boundary of the trend channel. 

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.