USD/INR drifts higher, focus on FOMC Minutes

Indian Rupee weakens on the firmer US Dollar.
The positive outlook of the Indian economy has boosted the market capitalization of Indian equities to rank fifth globally.
The US final ISM Manufacturing PMI, and FOMC Minutes will be due on Wednesday.

Indian Rupee (INR) edges lower on Wednesday amid renewed US Dollar (USD) demand. The optimistic outlook in the Indian economy by domestic and overseas investors has boosted the market capitalization of Indian equities to become the fifth largest in the world, just behind Hong Kong.

The Nifty experienced a rise of 20% in 2023, with over half of the gain occurring in the last two months. This was supported by faster-than-expected quarterly growth, rising bets on Federal Reserve (Fed) rate cuts in the first half of 2024, and steady retail participation.

The INR is likely to take more cues this week from moves in the US Dollar. Market players will keep an eye on the US final ISM Manufacturing PMI report and FOMC Minutes on Wednesday. On Friday, the US Nonfarm Payrolls report will be the highlight this week.

Daily Digest Market Movers: Indian Rupee remains strong amid the multiple headwinds

The Indian S&P Global Manufacturing PMI for December came in at 54.0 versus 56.0 prior, worse than the estimation of 55.9.
A pickup in foreign inflows into Indian markets has also boosted the Indian Rupee, but the upside is capped as the RBI likely intervened in the previous two weeks to absorb the inflows, according to traders.
The RBI has consistently intervened in foreign currency markets on both sides in recent weeks, maintaining the USD/INR pair in a limited trading range, according to traders.
Indian share of global market capitalization hit a record 3.8% in the last week of 2023, according to Bloomberg data.
The US final Manufacturing PMI came in at 47.9 in December from 48.2 in November, weaker than expected.
As per the CME FedWatch tool, the markets anticipate no hike at its upcoming January meeting and have priced in 78% odds of a rate cut in the March meeting.

Technical Analysis: Indian Rupee sticks to the longer-term range theme

Indian Rupee trades softer on the day. The USD/INR pair continues to move in a multi-month-old trading band of 82.80–83.40. Technically, the path of least resistance of USD/INR is to the upside as the pair holds above the key 100-period Exponential Moving Average (EMA) on the daily chart. The upward momentum is supported by the 14-day Relative Strength Index (RSI) which stands above the 50.0 midpoint.

The upper boundary of the trading range at 83.40 acts as the first upside barrier for USD/INR. Any follow-through buying above 83.40 will see a rally to the 2023 high of 83.47, en route to the 84.00 psychological figure. On the flip side, the initial contention level will emerge at 83.00. Further south, the downside target will emerge at the confluence of the lower limit of the trading range and a low of September 12 at 82.80. A breach of this level will see a drop to a low of August 11 at 82.60.

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Canadian Dollar.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		-0.17%	-0.18%	-0.01%	-0.02%	-0.04%	-0.41%	-0.02%
EUR	0.17%		0.00%	0.16%	0.14%	0.14%	-0.24%	0.16%
GBP	0.18%	0.02%		0.19%	0.16%	0.15%	-0.23%	0.17%
CAD	0.01%	-0.16%	-0.19%		-0.03%	-0.02%	-0.40%	-0.01%
AUD	0.02%	-0.13%	-0.16%	0.02%		-0.01%	-0.39%	0.01%
JPY	0.04%	-0.14%	-0.16%	0.03%	0.01%		-0.40%	0.02%
NZD	0.41%	0.25%	0.23%	0.42%	0.39%	0.38%		0.40%
CHF	0.02%	-0.14%	-0.17%	0.01%	-0.01%	-0.02%	-0.40%

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).

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

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.

How do the decisions of the Reserve Bank of India impact the Indian 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.

What macroeconomic factors influence the value of the Indian Rupee?

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.

How does inflation impact the Indian 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.

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