USD/INR extends upside on trade tariff concerns
- The Indian Rupee weakens in Monday’s early European session.
- Ongoing outflows from Indian stocks and the threat of a global trade war undermine the INR.
- Lower crude oil prices and RBI intervention might help limit INR’s losses.
The Indian Rupee (INR) trades with negative bias on Monday. The local currency remains on the defensive amid persistent outflows from local stocks, ongoing economic uncertainty and trade tariff concerns. Foreign investors have withdrawn almost $15 billion from Indian shares so far this year, putting outflows on track to surpass the record $17 billion registered in 2022. The selloff has wiped out $1.3 trillion from India’s market value.
However, a fall in crude oil prices might help limit the INR’s losses as India is the world's third-largest oil consumer. Additionally, the Reserve Bank of India (RBI) is expected to continue defending the INR, with the government expressing confidence that the central bank’s intervention would stagger the pace of the slide. This, in turn, might cap the upside for the pair. In the absence of the top-tier economic data releases from the US and India on Monday, the USD/INR pair will be influenced by the USD.
Indian Rupee remains fragile on global uncertainty and persistent outflows
- RBI said last week that it will infuse $21 billion in Rupee liquidity into the banking system in a bid to ease lending conditions and boost economic growth.
- The US Nonfarm Payrolls (NFP) rose by 151K in February, compared to the 125K increase (revised from 143K) seen in January, according to the US Bureau of Labor Statistics (BLS) on Friday. This figure came in weaker than the market expectation of 160K.
- The Unemployment Rate in the US edged higher to 4.1% in February from 4.0% in January. The annual wage inflation, as measured by the change in the Average Hourly Earnings, climbed to 4.0% from 3.9% (revised from 4.1%).
- San Francisco Fed President Mary Daly said late Sunday that rising uncertainty among businesses could dampen demand in the US economy but does not justify a change in interest rates.
- Fed Chair Jerome Powell noted on Friday, warning that policy uncertainty makes it difficult for the US central bank to enact policy adjustments.
- Fed Governor Adriana Kugler stated that whiplash trade policies could do a lot of damage, including pinning inflation at a persistently higher level.
USD/INR paints a positive picture despite consolidation in the near term
The Indian Rupee trades in a negative territory on the day. The constructive outlook of the USD/INR pair remains in place, characterized by the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The upward momentum is supported by the 14-day Relative Strength Index (RSI), which stands above the midline near 55.0, showing signs of bullish demand.
The immediate resistance level for USD/INR emerges at 87.53, the high of February 28. A decisive break above this level could draw in buying pressure to an all-time high near 88.00, en route to 88.50.
On the other hand, the first downside target to watch is 86.48, the low of February 21. Extended downswings can drag the pair lower to 86.14, the low of January 27, followed by 85.60, the low of January 6.
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.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
