The Indian Rupee (INR) trades on a weaker note on Thursday. A muted trend in the domestic market and a stronger US Dollar (USD) weigh on the local currency. However, robust Indian macroeconomic fundamentals and the inclusion of government bonds in global indices would attract foreign investors and lift the INR.
The release of the key US Consumer Price Index (CPI) inflation data will be the highlight on Thursday. The US Initial Jobless Claims will be released on the same day, and the Federal Reserve’s (Fed) Lisa Cook and John Williams are scheduled to speak.
The Indian Rupee edges lower on the day. The USD/INR pair maintains a constructive view on the daily chart, with the price holding above the descending trend line and the key 100-day Exponential Moving Average (EMA). The 14-day Relative Strength Index (RSI) is located above the midline near 58.60, suggesting the support level is likely to hold rather than break.
The 84.00 psychological level appears to be a tough nut to crack for USD/INR bulls. Sustained bullish momentum above this level could see a rally to the all-time high of 84.15, en route to 84.50.
On the flip side, the first downside target is seen near the resistance-turned-support level at 83.90. Any follow-through selling could expose the 100-day EMA at 83.67. The key contention level emerges at 83.00, representing the round mark and the low of May 24.
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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