The Indian Rupee (INR) holds steady against the US Dollar (USD) on Tuesday, with traders speculating that the Reserve Bank of India (RBI) likely intervened in the foreign exchange market to support the domestic currency and prevent it from weakening beyond the 84.00 level.
The USD/INR pair could appreciate in the near term as a broader decline in Asian equities and currencies emerges, fueled by rising concerns about a potential slowdown in the US economy. However, lower Oil prices may help ease downward pressure on the INR, as India, being the world's third-largest oil consumer and importer, stands to benefit from reduced import costs.
The US Dollar appreciates due to the reduced likelihood of an aggressive interest rate cut by the Federal Reserve (Fed) at its September meeting. According to the CME FedWatch Tool, the likelihood of a 50 bps rate cut has slightly decreased to 29.0%, down from 30.0% a week ago.
The Indian Rupee trades around 84.00 on Tuesday. A review of the daily chart shows that the USD/INR pair is consolidating within a symmetrical triangle pattern, signaling reduced volatility and a phase of consolidation. Despite this, the 14-day Relative Strength Index (RSI) remains above 50, indicating the bullish trend is still intact.
On the downside, the nine-day Exponential Moving Average (EMA) at 83.91 serves as immediate support, aligned with the lower boundary of the symmetrical triangle near 83.90. A break below this level could trigger a bearish shift, putting downward pressure on the USD/INR pair and potentially pushing it toward its six-week low around 83.72.
On the resistance side, the USD/INR pair is testing the upper boundary of the symmetrical triangle near the 84.00 level. A breakout above this point could drive the pair toward the all-time high of 84.14, recorded on August 5.
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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