The Indian Rupee (INR) remains under some selling pressure on Monday after reaching an all-time low in the previous session. Donald Trump's victory in the US Presidential election sparked a wave of Greenback strength and dragged the INR lower. Additionally, the weaker-than-expected Gross Domestic Product (GDP) data for the July-September quarter could spark fresh outflows from stocks, weighing on the local currency.
Donald Trump threatened 100% tariffs on BRICS nations, including India, if they went ahead with developing their common currency to replace the USD. Meanwhile, India has been cautious in its ambitious move to de-dollarise even as the United States recently became India's leading trading partner.
Investors await the HSBC India Manufacturing Purchasing Managers' Index (PMI) for November, which is estimated to ease to 57.3 from 57.5 in October. On Friday, the Reserve Bank of India (RBI) interest rate decision will be in the spotlight. Goldman Sachs analysts expect the Indian central bank to maintain the repo rate and policy stance unchanged but sound cautious on food inflation and acknowledge the moderation in growth. On the US docket, the ISM Manufacturing PMI will be released later on Monday.
The Indian Rupee trades weaker on the day. Technically, the constructive outlook of the USD/INR pair remains in play on the daily chart as the pair holds above the key 100-day Exponential Moving Average (EMA). The upward momentum is supported by the 14-day Relative Strength Index, which is located above the midline near 65.85, suggesting the path of least resistance is to the upside.
Bullish candlesticks and sustained trading above the ascending trend channel at 84.55 could lead USD/INR to the 85.00 psychological mark.
On the downside, bearish candlesticks below the lower limit of the trend channel of 84.28 could drag the pair back to 83.96, the 100-day EMA. If there’s enough bearish momentum, USD/INR could head for 83.65, the low of August 1.
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.
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