- The Indian Rupee edges lower in Monday’s Asian session.
- The preliminary reading of the HSBC Indian PMI improved in December.
- Elevated USD bids, weaker in Asian peers and a dovish tilt in RBI’s monetary policy could undermine the INR.
- Traders will take cues from the Indian WPI inflation data, which is due later on Monday.
The Indian Rupee (INR) weakens on Monday. Heightened US Dollar (USD) demand in the non-deliverable forwards market and a weaker Chinese Yuan weigh on the local currency. Furthermore, the growing expectations of a dovish tilt in monetary policy following the appointment of a new Reserve Bank of India (RBI) governor could contribute to the INR’s downside.
The preliminary estimate released by HSBC showed on Monday that the India Manufacturing Purchasing Managers Index (PMI) improved to 57.4 in December from 56.5 in November. Meanwhile, the Services PMI rose to 60.8 in December versus 58.4 prior and the Composite PMI climbed to 60.7 during the same report period from 58.6 in November. The local currency remains weak in an immediate reaction to the upbeat PMI data.
However, the RBI’s routine intervention in the market by selling USD might help limit the INR’s losses. Traders will keep an eye on the Indian WPI Inflation data, which is due later on Monday. The US Federal Reserve (Fed) will deliver its policy decision on Wednesday and investors Monitor its dot plot to assess if the median interest rate projections show a hawkish shift in the Fed's outlook.
Indian Rupee remains vulnerable, pressured by a rally in US Dollar
- The Indian Rupee depreciated by 1.5% against the US Dollar during the calendar year but outperformed most Asian currencies due to interventions by the Reserve Bank of India (RBI).
- India’s foreign exchange reserves declined by $3.2 billion to a more than five-month low of $654.86 billion as of December 6, the RBI showed on Friday.
- "The change in leadership at the RBI may lead to an initial market assumption that a rate cut in the February policy meeting is more likely," said VRC Reddy, treasury head at Karur Vysya Bank.
- According to the CME FedWatch tool, markets are now almost fully pricing a 25 basis points (bps) cut at the Fed's December meeting, compared with about a 78% chance a week ago.
USD/INR’s positive outlook prevails in the longer term
The Indian Rupee trades on a softer note on the day. The USD/INR pair keeps the bullish vibe on the daily chart as the pair is well supported above the key 100-day Exponential Moving Average (EMA). The upward momentum is supported by the 14-day Relative Strength Index (RSI), which is located above the midline near 66.35, suggesting that the path of least resistance is to the upside.
The ascending trend channel and the psychological level of 85.00 act as crucial resistance levels for USD/INR. A break above these levels could spur a rally to 85.50.
On the flip side, the initial support level for the pair is located at 84.75, the lower boundary of the trend channel. Extended losses below the mentioned level could drag USD/INR to the next bearish targets at 84.22, the low of November 25, followed by 84.12, the 100-day EMA.
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.
Higher inflation, particularly, if it is co
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