Indian Rupee (INR) trades softer on Wednesday amid renewed US dollar (USD) demand. In its latest monthly economic review for October 2023, the Ministry of Finance stated that even as inflationary pressures have moderated, there are persistent downside risks to growth and macroeconomic stability from inflation, which keeps the government and the Reserve Bank of India (RBI) on high alert. Furthermore, the report suggests a decline in crude oil prices and sustained moderation in core inflation could help alleviate inflationary pressures.
The minutes of the Federal Open Market Committee (FOMC) meeting released on Tuesday showed that all participants agreed to proceed carefully and policy decisions at every meeting would continue to be based on the totality of incoming information and economic outlook as well as the balance of risks.
Investors will keep an eye on the US data, including the weekly Jobless Claims Durable Goods Orders, and the University of Michigan Consumer Sentiment survey, due later on Wednesday. In the meantime, the dollar demand from state-run and foreign banks and foreign funds outflows might impact the INR.
The Indian Rupee trades weaker on the day. The USD/INR pair has traded within a trading range of 82.80–83.35 since September. The technical outlook suggests that the upleg of USD/INR stays intact as the pair holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. Meanwhile, the 14-day Relative Strength Index (RSI) holds above the 50.0 midline, suggesting the path of least resistance is to the upside.
The immediate resistance level for the pair will emerge at the upper boundary of the trading range of 83.35. Some follow-through buying should pave the way to the year-to-date (YTD) high of 83.47. The next hurdle is located near a psychological round mark at 84.00.
On the flip side, the confluence of the lower limit of the trading range and a low of September 12 at 82.80 acts as an initial support level for the pair. If sellers push prices below that level, the next contention to watch is a low of August 11 at 82.60, followed by a low of August 24 at 82.37.
The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the New Zealand Dollar.
USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
USD | -0.01% | 0.00% | -0.01% | -0.04% | -0.01% | 0.02% | -0.03% | |
EUR | -0.01% | -0.01% | 0.00% | -0.04% | 0.01% | 0.01% | -0.04% | |
GBP | -0.01% | -0.01% | -0.01% | -0.02% | -0.02% | 0.02% | -0.05% | |
CAD | -0.01% | 0.00% | 0.01% | -0.01% | -0.01% | 0.01% | -0.04% | |
AUD | 0.03% | 0.02% | 0.02% | 0.01% | 0.00% | 0.04% | -0.02% | |
JPY | 0.00% | 0.00% | 0.00% | 0.02% | -0.01% | 0.03% | -0.06% | |
NZD | -0.04% | -0.04% | -0.03% | -0.03% | -0.06% | -0.03% | -0.07% | |
CHF | 0.03% | 0.05% | 0.05% | 0.04% | 0.02% | 0.07% | 0.07% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
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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