USD/INR remains firm after the mixed Indian PMI data

The Indian Rupee holds steady in Friday’s early European session.
The Indian HSBC Manufacturing PMI eased in November; Services PMI improved to 59.2 in November vs. 58.5 prior.
Continued outflow of foreign funds and higher crude oil prices might weigh on the INR.
The flash US S&P Global PMI data will be in the spotlight on Friday.

The Indian Rupee (INR) trades flat on Friday after hitting an all-time low of 84.50 against the US Dollar (USD) in the previous session. The latest data released on Friday showed that the HSBC India Manufacturing Purchasing Managers Index (PMI) eased to 57.3 in November from the previous reading of 57.5. Additionally, the Indian Services PMI improved to 59.2 in November from 58.5 in October. The local currency remains flat in an immediate reaction to the mixed PMI data.

The significant sell-off in domestic equity markets and the rebound in crude oil prices amid the escalating geopolitical tensions between Russia and Ukraine could exert some selling pressure on the local currency. However, the routine intervention from the Reserve Bank of India (RBI), with state-run banks offering USD in the market, might help limit the INR’s losses.

Looking ahead, traders will keep an eye on the flash US S&P Global Purchasing Managers Index (PMI) data and the final Michigan Consumer Sentiment, which will be published later on Friday.

Indian Rupee remains vulnerable due to persistent outflows

RBI Governor Shaktikanta Das noted on Thursday that robust growth in the Indian economy has provided the Indian central bank with the flexibility to focus on inflation, aiming for a sustainable decline toward the target of 4%.
Portfolio outflows, persistent USD demand, and some concerns about a slowdown in the Indian economy are likely to keep the INR on a path of gradual depreciation, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.
The US Initial Jobless Claims fell to 213K for the week ending November 16, down from 219K (revised from 217K) in the previous week, according to the US Department of Labor on Thursday. This figure came in below the market consensus of 220K.
The US Existing Home Sales climbed 3.4% in October to a seasonally adjusted annual rate of 3.93 million units from an increase of 3.83 million in September.
Chicago Fed President Austan Goolsbee said on Thursday that it may make sense to slow the pace of Fed rate cuts as inflation is on its way down to 2%.

USD/INR’s positive view remains intact, but bearish RSI divergence teases sellers

The Indian Rupee trades on a flat note on the day. The USD/INR pair remains capped under an ascending trend channel. However, the bullish outlook of the pair prevails as the price holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. Meanwhile, a correction or a further consolidation cannot be ruled out as USD/INR made a new high but the 14-day Relative Strength Index (RSI) did not make a corresponding new high, as indicated by the bearish RSI divergence.

The first upside barrier emerges at the all-time high and the upper boundary of the trend channel of 84.50. Any follow-through buying above this level could pave the way to the 85.00 psychological level.

On the flip side, extended losses below the lower limit of the trend channel of 84.36 could expose the 84.00-83.90 zone, representing the round mark and the 100-day EMA.

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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