USD/INR softens ahead of US GDP data
- The Indian Rupee strengthens in Thursday’s Asian session.
- Likely RBI intervention might help limit the INR’s losses.
- The advanced US Q4 GDP report is due later on Thursday.
The Indian Rupee (INR) recovers some lost ground on Thursday after facing some selling pressure in the previous session. US Dollar sales by public sector banks, likely on behalf of the Reserve Bank of India (RBI) helped contain excess volatility in the local currency.
However, the month-end USD demand, maturity of positions in the non-deliverable forwards (NDF) market and cautious mood could weigh on the INR. Meanwhile, persistent foreign outflows and uncertainty about US President Donald Trump's approach to trade tariffs might contribute to the INR’s downside.
Investors brace for the advance US Gross Domestic Product (GDP) data for the fourth quarter (Q4), including the weekly Initial Jobless Claims, and Pending Home Sales. On Friday, India’s Federal Fiscal Deficit will take center stage.
Indian Rupee rebounds despite Trump tariff threats
- Overseas investors have sold nearly $9 billion of local stocks and bonds so far in January.
- The Fed held its overnight borrowing rate in a range between 4.25%-4.50% at its January meeting on Wednesday, as widely anticipated.
- During the press conference, Fed Chair Jerome Powell said that the central bank would need to see “real progress on inflation or some weakness in the labor market before we consider making adjustments.”
- Powell further stated that the committee is in wait-and-see mode, citing the uncertainty surrounding tariffs, immigration, fiscal policy, and regulatory policy under the Trump administration.
- Late Wednesday, US President Donald Trump's administration plans to rescind a climate rule adopted by the administration of former President Joe Biden requiring states to measure and set declining targets for greenhouse gas emissions from vehicles using the national highway system, per Reuters.
USD/INR’s outlook remains positive in the longer term
The Indian Rupee trades on a positive note on the day. The USD/INR pair remains capped within a narrow trading range on the daily timeframe. The positive bias of the USD/INR pair prevails as the price is well-supported above the key 100-day Exponential Moving Average (EMA). The upward momentum is reinforced by the 14-day Relative Strength Index (RSI), which is located above the midline near 64.05, suggesting the path of least resistance is to the upside.
On the bright side, the immediate resistance level for USD/INR is seen at an all-time high of 86.69. Extended gains above this level could pave the way to the 87.00 psychological mark.
On the flip side, the first downside target to watch is 86.31, the low of January 28. Any follow-through selling will expose 86.14, the low of January 24, followed by 85.85, the low of January 10.
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.