USD/INR weakens as tensions between India and Pakistan ease
- Indian Rupee edges higher in Wednesday’s Asian session.
- Trade deals made between US and China, and cessation of military hostilities between India and Pakistan, support the INR.
- Traders brace for the Fedspeak later on Wednesday.
The Indian Rupee (INR) gathers strength on Wednesday on the back of the US-China trade agreement and a ceasefire agreement between India and Pakistan. Analysts said that any fresh developments on the geopolitical front are likely to significantly influence the INR’s trajectory in the near term. The renewed Foreign Portfolio Investors (FPI) inflows into debt instruments and equities contribute to the Indian currency’s upside.
Nonetheless, the US Dollar (USD) bids from state-run banks and a rise in Crude oil prices could weigh on the local currency. It’s worth noting that India is the world's third-largest oil consumer, and higher crude oil prices tend to have a negative impact on the INR value. Traders will keep an eye on the speeches from the Federal Reserve (Fed) officials later on Wednesday, including Christopher Waller, Philip Jefferson and Mary Daly.
Indian Rupee gains ground on trade optimism and easing fears of India-Pakistan conflicts
- India's headline inflation, as measured by Consumer Price Index (CPI), eased to 3.16% YoY in April, the sixth consecutive month of decline. This reading came in lower than the previous reading of 3.34% and below the consensus of 3.27%.
- The inflation figure might pave the way for the Reserve Bank of India (RBI) to continue to cut rates, after the RBI Governor Sanjay Malhotra said in his statement after the April meeting that it will shift its stance from neutral to accommodative, aiming to boost the economy through softer interest rates.
- The ceasefire remained intact in Jammu and Kashmir and across border towns after India’s Prime Minister Narendra Modi's stern message to terrorists and Pakistan. Modi said that India will not tolerate any "nuclear blackmail,” adding that operations against Pakistan have only been paused, and the future will depend on their behavior.
- The US CPI increased by 2.3% YoY in April, compared to a rise of 2.4% in March, according to the US Bureau of Labor Statistics (BLS) on Tuesday. This reading came in below the market expectation of 2.4%.
- The US core CPI, which excludes volatile food and energy prices, climbed 2.8% YoY in April, compared to the previous reading and the estimation of 2.8%. On a monthly basis, the CPI and the core CPI rose by 0.2% in April.
USD/INR’s outlook remains bearish in the longer term
The Indian Rupee strengthens on the day. The USD/INR pair remains capped under the key 100-day Exponential Moving Average (EMA) on the daily chart, hinting that the longer-term downtrend for the pair might not be over just yet. Additionally, the 14-day Relative Strength Index (RSI) is below the midline near 45, suggesting that downward momentum could display in the near term.
The initial support level for USD/INR is located at 84.61, the low of May 12. If red candlesticks keep stacking up, the pair could revisit 84.12, the low of May 5. The additional downside filter to watch is 83.76, the low of May 2.
If bulls push past the 85.00 psychological level, there’s room to run toward 85.60, the 100-day EMA. A decisive break above this level could clear the way for a move back to the 86.00-86.05 zone, which marks both a round figure and the upper boundary of the trend channel.
Indian Rupee FAQs
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.