USD/INR remains weak, Indian WPI Inflation rose to 1.84% YoY in September
|- The Indian Rupee drifts higher in Monday’s early European session.
- India’s Wholesale Price Index (WPI) Inflation rose to 1.84% YoY in September from 1.31% in August, softer than the 1.90% expected.
- Elevated oil prices and sustained outflows from local stocks could weigh on the INR; RBI intervention might help limit its losses.
- The US NY Empire State Manufacturing Index for October will be released later on Monday.
The Indian Rupee (INR) recovers some lost ground on Monday after retreating to an all-time low in the previous session. India's Wholesale Price Index (WPI)-based inflation climbed to 1.84% YoY in September from 1.31% in the previous reading. This figure came in below the market consensus of 1.90%, according to the latest official data released on Monday. The INR trades with mild gains despite the cooler Indian inflation report.
The concerns about the recent spike in oil prices amid geopolitical tensions, significant foreign investor sell-offs from the equity market and higher demand for the greenback from foreign banks might undermine the local currency. Nonetheless, the likely intervention from the Reserve Bank of India (RBI) by US Dollar sales from state-run banks might cap the downside for the INR. Later on Monday, the US NY Empire State Manufacturing Index for October will be released.
Daily Digest Market Movers: Indian Rupee recovers, potential upside seems limited
- “Indian Rupee fell below the 84 per US Dollar mark for the first time on demand from foreign banks amid FII outflows and elevated crude oil prices. Weak domestic markets also weighed on the Rupee,” said Anuj Choudhary, Research Analyst, Sharekhan by BNP Paribas.
- The annual PPI rose 1.8% YoY in September, compared to a 1.9% increase seen in August, and came in above the market expectation of 1.6%. The core PPI climbed 2.8% YoY in the same period, surpassing analysts' forecast of 2.7%.
- On a monthly basis, the US PPI was unchanged in September, while the core PPI was up 0.2% during the same period.
- The preliminary reading of the US University of Michigan Consumer Sentiment Index fell to 68.9 in October from 70.1 in September, below the consensus of 70.8. The 5-year consumer inflation expectations came in at 3.0% in September.
- The swaps markets show the Fed’s odds for a 25 bps rate cut at 86.8%, up from 83.3% before the PPI data, according to the CME FedWatch Tool.
Technical Analysis: USD/INR’s broader trend remains constructive
The Indian Rupee trades in positive territory on the day. The positive view of the USD/INR pair remains intact as the pair is still above the ascending trend line and the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Additionally, the 14-day Relative Strength Index (RSI) is located above the midline near 64.20, hinting that the uptrend is more likely to gain traction than reverse.
The first upside barrier of USD/INR emerges near the all-time high of 84.15. A continuation of the climb past this level could pave the way for a test of 84.50.
On the flip side, the resistance-turned-support level at 83.90 acts as an initial support level for the pair. A breach of the mentioned level could see a drop to the 100-day EMA at 83.69, followed by 83.00, representing the round mark and the low of May 24.
Indian economy FAQs
The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.
India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.
Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.
India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.
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