- The Indian Rupee receives downward pressure from rising risk aversion.
- Lower crude Oil prices may ease downward pressure on the INR.
- The US Dollar gains ground due to the fading likelihood of further bumper rate cuts by the Fed.
The Indian Rupee (INR) edges lower against the US Dollar (USD) on Tuesday due to the fading likelihood of further aggressive interest rate cuts by the US Federal Reserve (Fed).
The USD/INR pair may weaken due to declining Oil prices, as India is the world's third-largest Oil importer, and Oil constitutes a significant portion of the country's import expenditures. Crude Oil prices are experiencing downward pressure following a media report indicating that Israel is inclined to avoid targeting Iranian Oil facilities, which has alleviated concerns about potential supply disruptions.
On Monday, the Indian Rupee received downward pressure as Foreign institutional investors sold a net total of 37.32 billion rupees ($444 million) in stocks, marking their eleventh consecutive session of net selling. In contrast, domestic investors net purchased shares valued at 22.78 billion rupees, per Reuters.
Daily Digest Market Movers: Indian Rupee loses ground due to rising risk aversion
- According to the CME FedWatch Tool, markets are currently pricing in an 88.2% probability of a 25-basis-point rate cut in November, with no anticipation of a larger 50-basis-point reduction.
- The Washington Post reported on Monday that Israeli Prime Minister Benjamin Netanyahu informed the United States (US) that Israel plans to focus on Iranian military targets rather than nuclear or Oil infrastructure.
- Federal Reserve (Fed) Bank of Minneapolis President Neel Kashkari reassured markets late on Monday by reaffirming the Fed's data-dependent approach. Kashkari reiterated familiar Fed policymaker views on the strength of the US economy, noting continued easing of inflationary pressures and a robust labor market, despite a recent uptick in the overall unemployment rate, per Reuters.
- The risk-sensitive INR faces challenges from safe-haven flows amid escalating tensions in the Middle East that have sparked concerns of a broader regional conflict. According to CNN, at least four Israeli soldiers were killed, and over 60 people were injured in a drone attack in north-central Israel on Sunday.
- India’s Consumer Price Index (CPI) increased to 5.49% year-over-year in September, up from 3.65% in the previous month, significantly surpassing market expectations of 5.0%. This marks the highest inflation rate recorded since the beginning of the year, exceeding the Reserve Bank of India's target of 4%, after dipping below this threshold in the first two months of the September quarter.
Technical Analysis: USD/INR remains above 84.00, close to the highest level
The USD/INR pair trades around 84.00 on Tuesday. Analysis of the daily chart shows that the USD/INR pair is positioned within the ascending channel pattern, suggesting a bullish bias. Additionally, the 14-day Relative Strength Index (RSI) remains above the 50 level, confirming the ongoing bullish sentiment for the pair.
In terms of resistance, the USD/INR pair could find a barrier around its all-time high of 84.14, recorded on August 5. A break above this level could support the pair to explore the region around the upper boundary of the ascending channel at 84.30 level.
On the downside, the immediate support appears at the lower boundary of the ascending channel around the psychological level of 84.00 followed by the nine-day Exponential Moving Average (EMA) at 83.97 level.
USD/INR: Daily Chart
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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