The Indian Rupee (INR) weakens on the modest recovery of the Greenback on Thursday, snapping the two-day winning streak. The escalating geopolitical tensions in the Middle East, heightened US Dollar (USD) demand from local importers and a rise in crude oil prices all contribute to the INR’s downside. However, significant weakness might prompt intervention from the Reserve Bank of India (RBI) to stabilize the local currency.
The RBI Monetary Policy Committee (MPC) meeting will take centre stage on Thursday. RBI Governor Shaktikanta Das is scheduled to announce the interest rate decision on Thursday at 4.30 a.m. GMT. The Indian central bank is expected to keep the policy rate at 6.5%. On the US docket, investors will monitor the weekly Initial Jobless Claims for confirmation of slowing economic numbers, particularly employment.
Indian Rupee trades softer on the day. The chart shows a long-term bullish trend for the USD/INR pair as it holds above the key 100-day Exponential Moving Average (EMA) and the uptrend line since June 3. The 14-day Relative Strength Index (RSI) stands above the midline near 68.20, suggesting sustained upward strength.
The immediate upside barrier for the pair emerges at the 84.00 psychological barrier. A decisive break above this level could draw in enough buying pressure to test the next hurdle at 84.50.
In the bearish case, the initial contention level to watch is the uptrend line around 83.80. If the price breaks below this level, it would signal a more significant downside towards the next support level near the 100-day EMA at 83.50.
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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