USD/INR gains momentum as Trump threatens BRICS with tariffs

The Indian Rupee weakens in Friday’s Asian session.
Ongoing foreign outflows, month-end USD demand and a hawkish Fed weigh on the INR.
Traders brace for India’s Fiscal Deficit and US December PCE data, which will be published later on Friday.

The Indian Rupee (INR) remains weak on Friday, pressured by the persistent portfolio outflows and month-end US Dollar (USD) demand. Furthermore, a hawkish hold from the U.S. Federal Reserve (Fed) is likely to boost the Greenback and exert some selling pressure on the local currency. Fed Chair Jerome Powell said there would be no rush to cut the interest rate again.

On the other hand, the routine foreign exchange intervention from the Reserve Bank of India (RBI) by selling the USD might prevent the INR from significantly depreciating. Later on Friday, India’s Federal Fiscal Deficit will take center stage. On the US docket, traders will keep an eye on the December Personal Consumption Expenditures (PCE), Personal Income/Spending, the Chicago Purchasing Managers' Index (PMI) and the speech from Fed Governor Michelle Bowman.

Traders will also closely monitor the development surrounding Trump's policies, including import tariffs, an immigration crackdown, tax cuts and looser regulation. Analysts expect Trump's policies might fuel inflationary pressures in the US economy and prompt the Fed to keep rates higher for longer.

Indian Rupee remains on the defensive amid global cues

India's economy is likely to slowdown in 2025, primarily driven by persistent inflationary pressures and a moderation in domestic demand, said Moody’s in its latest report.
The Indian Rupee has weakened over 1% in January so far and is the worst performer among major Asian currencies.
US President Donald Trump threatens BRICS countries with 100% tariffs if they create a new currency.
The US Gross Domestic Product (GDP) grew at an annual rate of 2.3% in the fourth quarter (Q4), compared to the 3.1% expansion seen in Q3, the US Bureau of Economic Analysis (BEA) first estimate showed on Thursday. This reading came in weaker than the market expectation of 2.6%.
The US Initial Jobless Claims for the week ending January 24 rose to 207K, according to the US Department of Labor. This reading came in lower than the previous week's 223K and the consensus of 220K.
The US Pending Home Sale declined by 5.5% MoM in December from a 1.6% increase (revised from 2.2%) in November, missing the estimation.

USD/INR consolidates amid a strong uptrend

The Indian Rupee trades in negative territory on the day. The USD/INR pair has traded within the upper boundary of the trading range on the daily chart. The constructive outlook of the pair remains intact as the price is above the key 100-day Exponential Moving Average (EMA). Additionally, the 14-day Relative Strength Index (RSI) is located above the midline near 65.45, suggesting that further upside looks favorable.

The first upside barrier emerges at an all-time high of 86.69. If the pair extends its gains, we could see a run for a fresh peak at the 87.00 psychological mark.

On the flip side, the initial support level is seen at 86.31, the low of January 28. A breach of this level could draw in sellers and drag the pair back down to 86.14, the low of January 24, followed by 85.85, the low of January 10.

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.