The Indian Rupee (INR) posts modest gains on Friday on the weaker Greenback. The month-end US Dollar (USD) demand and India’s foreign outflows drag the INR lower to an all-time low on Thursday. Forex traders said foreign fund outflows from Indian equities following the government’s decision to raise capital gains tax from equity investments and equity derivative trades might weigh on the local currency in the near term.
However, the potential intervention from the Reserve Bank of India (RBI) might cap the INR’s downside, with support from record-high foreign exchange reserves. Investors will closely monitor the US Personal Consumption Expenditures (PCE) Price Index data for June on Friday. The headline PCE is expected to show an increase of 0.1% MoM in June, while the Fed’s preferred measure of inflation, the Core PCE, is expected to ease to 2.5% YoY in June from 2.6%. The softer PCE inflation data could pave the way for the Fed to lower its key interest rate as soon as September and might weaken the USD.
The Indian Rupee trades with mild gains on the day. The USD/INR pair maintains the uptrend, characterized by higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Furthermore, the 14-day Relative Strength Index (RSI) holds above the midline near 62.45, indicating bullish momentum.
The immediate resistance level for the pair will emerge at the all-time high of 83.85. Extended gains above this level could take USD/INR to the 84.00 psychological mark.
On the other hand, any follow-through selling below 83.65, a low of July 23, might drag the pair lower to 83.51, a low of July 12. The potential support level is seen at 83.42, the 100-day EMA.
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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