USD/INR drifts lower following the Indian inflation data
|- Indian Rupee holds positive ground on the decline of US Dollar.
- Analysts anticipate the Reserve Bank of India (RBI) to hold rates into next year.
- Indian WPI inflation came in at 0.26% vs. -0.52% prior, better than the expectation of 0.08%.
Indian Rupee (INR) gains traction on Thursday amid the US Dollar (USD) weakness. The Greenback faces some selling pressure from the Federal Reserve (Fed) Chairman Jerome Powell’s dovish remarks. Additionally, the dot plot now projects three rate cuts of 25 basis points (bps) each in 2024 instead of two.
On the other hand, the Reserve Bank of India (RBI) held its benchmark interest rate steady for a fifth straight policy meeting last week. Analysts anticipate the RBI to hold rates into next year and will ease the policy after the Fed begins cutting interest rates.
RBI Governor Shaktikanta Das stated that the Indian economy remains vulnerable to recurring and overlapping food price shocks. The surge in inflation was primarily driven by rising food prices, which has been an important issue for Prime Minister Narendra Modi's administration as elections approach.
Market players will keep an eye on the US weekly Jobless Claims and Retail Sales. The Retail Sales figure is expected to drop by 0.1% MoM in November. On Friday, the US S&P Global Purchasing Managers' Index (PMI) and Industrial Production will be released.
Daily Digest Market Movers: Indian Rupee remains sensitive to rising food prices and global factors
- India’s WPI Inflation climbed by 0.26% YoY in November from the previous reading of 0.52% decline, beating the estimation of 0.08%.
- India’s Wholesale Price Food Index came in at 4.69% YoY in November while the WPI Fuel Price Index arrived at -4.61% YoY in the same period.
- India’s WPI Manufacturing Inflation for November dropped by 0.64% YoY from a 1.13% fall in the previous reading.
- India's Consumer Price Index (CPI) grew 5.55% YoY in November from 4.87% in October, worse than the expectation of 5.70%.
- Indian Industrial Production rose by 11.7% in October, compared to a 4.1% gain in the previous reading while Manufacturing Output in the same period came in at 10.4% MoM versus 4.9% prior.
- The International Monetary Fund (IMF) projected India's Real Gross Domestic Product (real GDP) to expand by more than 6.0% in 2023 and 2024, marking one of the fastest-growing in the world over the next few years.
- The Federal Reserve (Fed) kept the interest rates steady at the target range of 5.25%-5.5% in its December meeting, as widely expected.
- Fed Chair Jerome Powell said discussion about cutting rates is still ahead and the central will decide very carefully. Powell added that the Fed is very focused on not making the mistake of maintaining interest rates too high for too long.
- The Fed now estimated three rate cuts next year rather than two, according to interest rate projections.
- The US Core Producer Price Index (PPI) for November came in worse than the market expectation, easing from 2.3% to 2.0% YoY. The headline PPI figure fell 0.9% in November from a 1.2% rise in October.
Technical Analysis: Indian Rupee sticks to the positive stance
Indian Rupee trades on a stronger note on the day. The USD/INR pair has remained stuck in a trading range of 82.80-83.40 since September. From the technical perspective, the bullish outlook of USD/INR remains intact as the pair holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. However, the 14-day Relative Strength Index (RSI) hovers around the 50.0 midline, warrants caution for bulls.
The upper boundary of the trading range at 83.40 acts as an immediate resistance level for the pair. Any follow-through buying above 83.40 will pave the way to the year-to-date (YTD) high of 83.47, followed by a round figure of 84.00. On the flip side, the key support level is seen at the 83.00 psychological round mark. A breach below this level will see a drop to the lower limit of the trading range and a low of September 12 at 82.80. A convincing breakout below the trading range will see the next downside stop near a low of August 11 at 82.60.
US Dollar price this week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Pound Sterling.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -1.28% | -0.72% | -0.86% | -2.20% | -2.49% | -1.94% | -1.32% | |
| EUR | 1.26% | 0.57% | 0.41% | -0.91% | -1.17% | -0.66% | -0.05% | |
| GBP | 0.73% | -0.56% | -0.14% | -1.46% | -1.73% | -1.21% | -0.60% | |
| CAD | 0.86% | -0.41% | 0.14% | -1.32% | -1.61% | -1.06% | -0.45% | |
| AUD | 2.15% | 0.90% | 1.44% | 1.31% | -0.25% | 0.25% | 0.86% | |
| JPY | 2.42% | 1.15% | 1.63% | 1.57% | 0.27% | 0.52% | 1.11% | |
| NZD | 1.91% | 0.65% | 1.21% | 1.06% | -0.24% | -0.53% | 0.62% | |
| CHF | 1.31% | 0.05% | 0.60% | 0.46% | -0.86% | -1.14% | -0.60% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
RBI FAQs
What is the role of the Reserve Bank of India?
The role of the Reserve Bank of India (RBI), in its own words, is "..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.
How do the decisions of the Reserve Bank of India affect the Rupee?
The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.
Does the Reserve Bank of India directly intervene in FX markets?
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.
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