- The Indian Rupee weakens in Friday’s early European session.
- Ongoing foreign outflows, month-end USD demand and a hawkish Fed weigh on the INR.
- Traders brace for India’s Fiscal Deficit and US December PCE data, which will be published later on Friday.
The Indian Rupee (INR) remains weak on Friday, pressured by the persistent portfolio outflows and month-end US Dollar (USD) demand. Furthermore, a hawkish hold from the U.S. Federal Reserve (Fed) is likely to boost the Greenback and exert some selling pressure on the local currency. Fed Chair Jerome Powell said there would be no rush to cut the interest rate again.
On the other hand, the routine foreign exchange intervention from the Reserve Bank of India (RBI) by selling the USD might prevent the INR from significantly depreciating. Later on Friday, India’s Federal Fiscal Deficit will take center stage. On the US docket, traders will keep an eye on the December Personal Consumption Expenditures (PCE), Personal Income/Spending, the Chicago Purchasing Managers' Index (PMI) and the speech from Fed Governor Michelle Bowman.
Traders will also closely monitor the development surrounding Trump's policies, including import tariffs, an immigration crackdown, tax cuts and looser regulation. Analysts expect Trump's policies might fuel inflationary pressures in the US economy and prompt the Fed to keep rates higher for longer.
Indian Rupee remains under selling pressure amid global cues
- India's economy is likely to slowdown in 2025, primarily driven by persistent inflationary pressures and a moderation in domestic demand, said Moody’s in its latest report.
- The Indian Rupee has weakened over 1% in January so far and is the worst performer among major Asian currencies.
- US President Donald Trump threatens BRICS countries with 100% tariffs if they create a new currency.
- "We are going to require a commitment from these seemingly hostile Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs,” said Trump on Truth Social.
- The US Gross Domestic Product (GDP) grew at an annual rate of 2.3% in the fourth quarter (Q4), compared to the 3.1% expansion seen in Q3, the US Bureau of Economic Analysis (BEA) first estimate showed on Thursday. This reading came in weaker than the market expectation of 2.6%.
- The US Initial Jobless Claims for the week ending January 24 rose to 207K, according to the US Department of Labor. This reading came in lower than the previous week's 223K and the consensus of 220K.
- The US Pending Home Sale declined by 5.5% MoM in December from a 1.6% increase (revised from 2.2%) in November, missing the estimation.
USD/INR consolidates amid a strong uptrend
The Indian Rupee trades in negative territory on the day. The USD/INR pair has traded within the upper boundary of the trading range on the daily chart. The constructive outlook of the pair remains intact as the price is above the key 100-day Exponential Moving Average (EMA). Additionally, the 14-day Relative Strength Index (RSI) is located above the midline near 65.45, suggesting that further upside looks favorable.
The first upside barrier emerges at an all-time high of 86.69. If the pair extends its gains, we could see a run for a fresh peak at the 87.00 psychological mark.
On the flip side, the initial support level is seen at 86.31, the low of January 28. A breach of this level could draw in sellers and drag the pair back down to 86.14, the low of January 24, followed by 85.85, the low of January 10.
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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