The Indian Rupee (INR) drifts lower on the stronger US Dollar (USD) on Monday. The INR was the second-worst-performing Asian currency in August, pressured by strong USD from state-run banks. However, the downside might be limited amid likely inflows into local equities and a further decline in crude oil prices.
Investors await the Indian HSBC Manufacturing PMI for August on Monday, which is estimated to remain unchanged at 47.9. On the US docket, ISM Manufacturing PMI for August is due on Tuesday. The US Nonfarm Payrolls (NFP) will be closely watched on Friday. This data might offer some cues about the size and pace of the Federal Reserve (Fed) interest rate cuts. Another weaker reading might exert some selling pressure on the USD.
The Indian Rupee trades on a weaker note on the day. The USD/INR remains capped under the 84.00 barrier. However, the positive view of the USD/INR remains in play as the pair is well-supported above the key 100-day Exponential Moving Average (EMA) on the daily chart. The 14-day Relative Strength Index (RSI) holds in the bullish zone near 54.50, indicating the overall momentum is strongly in favor of the bulls.
The crucial upside barrier for USD/INR is located at the 84.00 round figure. Extended gains will attract some buyers to 84.50.
On the other hand, the low of August 20 at 83.77 acts as an initial support level for the pair. Any follow-through selling will see a drop to the 100-day EMA at 83.61.
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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