USD/INR trades with mild gains amid further foreign outflows

The Indian Rupee softens in Thursday’s Asian trading hours.
Persistent outflows from foreign investors, renewed USD demand and uncertainties weigh on the INR.
The US weekly initial Jobless Claims data is due later on Thursday.

The Indian Rupee (INR) edges lower on Thursday. The continued selling by Foreign Institutional Investors (FIIs), US Dollar (USD) demand from importers and global uncertainties continue to undermine the local currency.

Nonetheless, lower crude oil prices might help limit the INR’s losses as India is the world's third-largest oil consumer. The Reserve Bank of India (RBI) likely played a key role by conducting dollar-rupee swaps to manage liquidity and support the Indian Rupee.

Investors brace for the US weekly initial Jobless Claims data, which is due later on Thursday. On Friday, the preliminary reading of HSBC India’s Purchasing Managers Index (PMI) and US S&P PMI data for January will be in the spotlight.

Indian Rupee remains weak amidst persistent global uncertainties

The Securities and Exchange Board of India (SEBI) has proposed that fund houses launch sachet-sized investment plans. The objective is to "promote financial inclusion, inculcate the habit of systematic saving, and facilitate investment of small savings by investors new to the Mutual Fund space,” noted SEBI.
India is likely to raise major subsidies by 8% year-on-year to 4.1 trillion rupees ($47.41 billion) in the next fiscal year, government sources said.
Indian Finance Minister Nirmala Sitharaman will present the national budget on February 1, amid slowing growth in Asia's third-largest economy and rising global uncertainties.
Foreign investors have sold a net total of about $6.5 billion worth of local equities and bonds in January, the largest monthly outflow since October 2023.

USD/INR keeps the bullish vibe in the longer term

The Indian Rupee trades in negative territory on the day. The constructive outlook of the USD/INR pair remains intact as the price has formed higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. Furthermore, the 14-day Relative Strength Index (RSI) stands above the midline near 67.30, suggesting that the support is likely to hold rather than break.

The key resistance level for the pair emerges at an all-time high of 86.69. Sustained bullish momentum above this level could pave the way for a rally to the 87.00 psychological mark.

On the other hand, any follow-through selling below 86.18, the low of January 20, could expose 85.85, the low of January 10. The additional downside filter to watch is 85.65, the low of January 7.

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

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.

How do the decisions of the Reserve Bank of India impact the Indian 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.

What macroeconomic factors influence the value of the Indian Rupee?

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.

How does inflation impact the Indian 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.