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USD/INR strengthens ahead of Indian CPI data

  • The Indian Rupee edges lower in Tuesday’s Asian session. 
  • Sustained outflows from local equities weigh on the INR. 
  • Investors will monitor India’s October Consumer Price Index (CPI) and Fedspeak on Tuesday.

The Indian Rupee (INR) remains weak near an all-time low on Tuesday. The downward pressure for the local currency is pressured by persistent foreign fund outflows and a muted trend in domestic equities. Additionally, the renewed US Dollar (USD) demand from oil companies and foreign banks contributes to the INR’s downside. 

Nonetheless, the significant depreciation of the INR might be capped by the decline in crude oil prices and the likely foreign exchange intervention by the Reserve Bank of India (RBI). Looking ahead, traders brace for India’s October Consumer Price Index (CPI), which is due on Tuesday. On the US front, the Federal Reserve’s (Fed) Christopher Waller, Thomas Barkin, Neel Kashkari and Patrick Harker are scheduled to speak later in the day. On Wednesday, the attention will shift to the US October CPI inflation data. 

Indian Rupee slips to near a fresh low, hurt by outflows from local equities

  • Foreign investors have withdrawn more than $2.5 billion from Indian stocks over November so far, adding to the $11 billion of outflows in October.
  • “In the medium term, the rupee is expected to trade within the 83.80 to 84.50 range, as the Reserve Bank seems to cap the downside of the rupee with sufficient Forex reserves in its kitty,” said Amit Pabari, CR Forex Advisors MD. 
  • India’s foreign exchange reserves declined by $2.675 billion to $682.13 billion for the week ended November 1, the RBI said on Friday.
  • The Indian Rupee could undergo a depreciation of 8%-10% against the US Dollar with Trump’s return to power, even as the local currency recorded an all-time low of 84.38 on Monday, according to the State Bank of India (SBI). 
  • The Indian CPI is expected to show an increase of 5.80% YoY in October versus 5.49% prior. 
  • The markets have priced in nearly 65.3% of the 25 basis points (bps) rate cut by the Fed at the December meeting, down from 75% last week, according to the CME FedWatch Tool.  

USD/INR keeps the bullish vibe in the longer term, though overbought RSI suggest caution 

The Indian Rupee weakens on the day. The strong uptrend of the USD/INR pair remains intact, with the pair holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. However, further consolidation looks favorable 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 emerges at 84.50. A strong rally past the mentioned level could clear the way for the 85.00 psychological level.

In the bearish event, any follow-through selling below the lower limit of the trend channel and the high of October 11 in the 84.05-84.10 zone could see a drop to 83.84, the 100-day EMA. Further south, the next support level to watch is 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.