- The Indian Rupee edges lower in Wednesday’s early European session.
- Trump is set to implement tariffs on US trading partners on Wednesday.
- The US March ADP Employment Change is due later on Wednesday.
The Indian Rupee (INR) softens on Wednesday. The local currency retreats after logging its best monthly rise in over six years, driven by a weaker Greenback and renewed foreign inflows into equities. Analysts expect the INR's near-term outlook to depend on US President Donald Trump's anticipated reciprocal tariff on major trading partners, set on Wednesday. Traders will assess how the levies may impact global trade and growth prospects.
Looking ahead, traders brace for US President Donald Trump’s announcement of reciprocal tariffs later on Wednesday. Also, the US March ADP Employment Change will be published. Remarks from Federal Reserve (Fed) officials will also be in focus throughout the week.
The Reserve Bank of India (RBI) will announce its interest rate decision next week. A Reuters poll of economists anticipates just one more rate cut in August, which would mark its shortest easing cycle on record. This, in turn, might exert further mild downward pressure on the Indian currency.
Indian Rupee remains weak ahead of Trump’s tariff announcement
- In March, the rupee posted its best monthly performance in more than six years, bolstered by foreign portfolio and other inflows, coupled with a scaling back of bearish wagers.
- Overseas investors bought nearly $4 billion of Indian equities and bonds, a significant reversal from approximately $12 billion in outflows seen in January and February.
- “The rupee has benefited from a recent weakness in the dollar and the Reserve Bank of India allowing for a two-way movement, but key risks to India's external sector balance continue to stem from the uncertainties on U.S. trade/tariff policies," Kotak Institutional Equities said in a note.
- Trump said that he will impose “reciprocal tariffs” on Wednesday, suggesting that many countries with their own duties on US goods could suddenly face new trade barriers. The White House stated that Trump’s forthcoming tariffs will take effect right after they are unveiled on Wednesday.
- US Treasury Secretary Scott Bessent said late Tuesday that the amounts announced on Wednesday are the highest the tariffs will go. However, countries could then take steps to bring the tariffs down.
- The US ISM Manufacturing Purchasing Managers Index (PMI) declined to 49.0 in March from 50.3 in February. This figure came in below the market consensus of 49.5.
- Chicago Fed President Austan Goolsbee said late Tuesday that US hard data are strong, but soft data almost cratering. Goolsbee further stated that uncertainty is tainted with fear regarding inflation.
USD/INR’s bearish outlook remains intact below the 100-day EMA
The Indian Rupee trades weaker on the day. According to the daily chart, the USD/INR pair keeps the bearish vibe, with the price holding below the key 100-day Exponential Moving Average (EMA). The path of least resistance is to the downside as the 14-day Relative Strength Index (RSI) stands below the midline near 32.90.
The 85.00 psychological level acts as an initial support level for the pair. The additional downside filter to watch is 84.84, the low of December 19. The next bearish target is seen at 84.22, the low of November 25, 2024.
On the other hand, the key resistance level for USD/INR is located in the 85.90-86.00 zone, representing the 100-day EMA and round mark. Sustained upside momentum could pave the way to 86.48, the low of February 21, and then a rally to 87.00, the round figure.
Indian Rupee FAQs
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.
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.
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.
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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