USD/INR softens on renewed foreign inflows
- Indian Rupee strengthens in Monday’s Asian session.
- Prospects of foreign equity inflows and a weaker US dollar underpin the INR.
- Investors brace for India’s HSBC PMI and US S&P Global PMI data due later on Wednesday.
The Indian Rupee (INR) edges higher on Monday. The renewed foreign inflows and the US Dollar (USD) weakness continue to support the local currency. Concerns over the economic impact of new tariffs on the US economy dragged the Greenback lower. Investors will closely monitor if US President Donald Trump’s administration reaches new trading agreements with partners.
Meanwhile, hawkish remarks from the US Federal Reserve (Fed) have reduced the likelihood of a Fed rate reduction in June, which might lift the USD in the near term. Additionally, markets will watch the Reserve Bank of India (RBI), which seems to be buying the USD to curb the INR rise. The US Richmond Fed Manufacturing Index for April is due on Tuesday. On Wednesday, India’s HSBC Purchasing Managers’ Index (PMI) for April and US S&P Global PMI reports will be the highlights.
Indian Rupee trades firmer amid unpredictable US tariffs
- Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that FII inflows and global trends offer support to the INR. “This reversal has been driven by the weakening dollar index and expectations of further dollar softness, which are encouraging FIIs to shift from the US to emerging markets like India,” Vijayakumar said.
- Moody’s Ratings said the Indian economy could grow in the band of 5.5% to 6.5% during the calendar year 2025, lower than its February projection of 6.6%.
- San Francisco Fed President Mary Daly said on Friday that while she is still comfortable with a couple of interest rate cuts this year, rising risks of inflation mean the Fed may need to do less, especially given the uncertainty over President Donald Trump's trade policy.
- Financial markets expect the Fed to resume rate cuts in June and that by year-end the policy rate, currently in the 4.25%-4.50% range, will be a full percentage point lower.
USD/INR’s bearish bias lingers under the 100-day EMA
The Indian Rupee trades on a stronger note on the day. The USD/INR pair keeps the bearish vibe on the daily chart, with the price holding below the key 100-day Exponential Moving Average (EMA). The downward momentum is supported by the 14-day Relative Strength Index (RSI), which stands below the midline near 38.10.
The key support level for USD/INR emerges in the 85.00-84.95 zone, representing the psychological level and the lower limit of the descending trend channel. A breach of this level could expose 84.53, the low of December 6, 2024. Further south, the next downside target to watch is 84.22, the low of November 25, 2024.
On the bright side, the first upside barrier is located at 85.87, the 100-day EMA. Any follow-through buying above the mentioned level could see a rally to 86.55, the upper boundary of the trend channel. The additional upside filter to watch is 86.71, the high of April 9.
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.