The Indian Rupee (INR) trades with mild gains on Friday as the dovish US Federal Reserve (Fed) minutes and lower crude oil prices support the local currency. Traders also expect the INR’s downside might be limited as the Reserve Bank of India (RBI) might step in to sell the USD and prevent the INR from breaching the key 84.00 level.
Nonetheless, the relentless Greenback demand from importers and ongoing foreign fund outflows might dampen investor sentiments and drag the Indian Rupee lower. The Fed Chair Jerome Powell's speech at the Jackson Hole Symposium will take center stage on Friday, which could offer some insight into the future US interest rate path.
Indian Rupee trades firmer on the day. The most notable feature of the USD/INR pair is the strong uptrend as the price remains above the key 100-day Exponential Moving Average (EMA) and the 11-week-old uptrend line. Additionally, the 14-day Relative Strength Index (RSI) points higher above the midline near 58.40, suggesting that the bullish momentum is sustained.
If USD/INR pops up bullish pressure above the 84.00 psychological mark, the pair could retest the record high of 84.24. A decisive break above this level may attract buyers to 84.50.
Sustained trading below the ascending trendline around 83.92 could draw in sellers and drag the pair to 83.77, the low of August 20. The next contention level to watch is the 100-day EMA at 83.57.
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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