- The Indian Rupee trades in negative territory in Monday's early European session.
- Indian economic slowdown, foreign outflows and RBI rate cuts continue to undermine the INR.
- The RBI intervention and lower crude oil prices might cap the downside for local currency.
The Indian Rupee (INR) weakens on Monday, snapping the two-day winning streak. The sluggish growth in the Indian economy, continued Foreign Institutional Investors (FIIs) outflows, and the Reserve Bank of India (RBI) rate cut dragged the local currency lower against the USD.
Nonetheless, the intervention from the RBI by selling the USD might help limit the INR’s losses. Additionally, the decline in crude oil prices is likely to support the Indian Rupee, as India is the world's third-largest consumer of crude oil. The Indian Trade Balance will be released later on Monday. On the US front, the Federal Reserve (Fed) Patrick Harker and Michelle Bowman are scheduled to speak. The US market will be closed on Monday in observance of President's Day.
Indian Rupee remains fragile amid sluggish growth, RBI rate cuts
- India's Wholesale Price Index (WPI) inflation slightly decreased to 2.31% in January from 2.37% in December, softer than the 2.50% expected.
- "A sustained domestic market rally is unlikely since the FIIs continue to be on sell mode. Only a decline in dollar and US bond yields will turn the FIIs into buyers," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
- US President Donald Trump said last week that Indian Prime Minister Narendra Modi offered to talk about easing tariffs and importing more US oil and gas to shrink the trade deficit between the two countries.
- US Retail Sales declined by 0.9% in January from the 0.7% increase (revised from 0.4%) in December, according to the US Census Bureau on Friday. This figure came in weaker than the market expectation for a decrease of 0.1%.
- Industrial Production increased by 0.5% MoM in January, compared to 1.0% (revised from 0.9%) in December, beating the estimation of a 0.3% rise.
USD/INR maintains a positive tone, further sideways expected in the near term
The Indian Rupee trades softer on the day. Technically, the bullish outlook of the USD/INR pair prevails, characterized by the price being well-supported above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Nonetheless, further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) hovers around the midline.
The 87.00 psychological level acts as an immediate resistance level for USD/INR. Sustained gains past the mentioned level could allow bulls to set their sights on the next targets at an all-time high near 88.00, en route to 88.50.
On the downside, the initial support level is seen at 86.35, the low of February 12. A breach of this level could send the pair back down to 86.14, the low of January 27.
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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