- The Indian Rupee gains traction in Monday’s early European session.
- India’s WPI inflation rose to 2.38% in February from 2.31% in January.
- The weaker US Dollar broadly supports the INR, but higher crude oil prices might cap its gains.
- Investors brace for the US February Retail Sales data, which are due later on Monday.
The Indian Rupee (INR) strengthens on Monday, bolstered by US Dollar (USD) sales from foreign banks. The concerns about slowing growth in the US economy from US President Donald Trump administration's trade policies weigh on the Greenback and provide some support to the INR.
Nonetheless, the upside for the local currency might be limited amid a rise in crude oil prices. It’s worth noting that India is the world's third-largest oil consumer and higher crude oil prices tend to have a negative impact on the INR value.
Data released by the Ministry of Commerce and Industry on Monday showed that India’s Wholesale Price Index (WPI) inflation rose to 2.38% in February from the previous reading of 2.31%. This figure came in hotter than the expectation of 2.36%. The local currency remains stronger in an immediate reaction to the hotter inflation report.
Looking ahead, the US Retail Sales data for February will be released later on Monday. This report might offer cues on US consumer sentiment and whether policy uncertainty has prompted a slowdown in spending. Investors will closely watch the US Federal Reserve (Fed) interest rate decision on Wednesday, which is expected to keep interest rates unchanged. The primary focus will be on the Fed's policy guidance.
Indian Rupee gathers strength amid multiple headwinds
- The Indian Rupee is likely to face strong resistance around 86.50 while finding support in the 87.40-50 zone, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.
- India’s economic indicators for February reflect a moderation in inflation, improved industrial output and strong corporate earnings, according to the latest SBI Ecowrap report.
- India is projected to be the world's third-largest economy by 2028 as it becomes the world's most sought-after consumer market and gains share in global output, driven by macro stability influenced policy and better infrastructure, said Morgan Stanley.
- The preliminary reading of the University of Michigan (UoM) Consumer Sentiment Index showed that the index reached its lowest since November 2022, falling to 57.9 from 64.7 in the previous reading. This reading came in below the market consensus of 63.1.
- The UoM five-year Consumer Inflation Expectation jumped to 3.9% in March, compared to 3.5% in February.
- Markets widely expect the Fed will stay on hold when it concludes its two-day meeting on Wednesday. The markets have priced in nearly a 75% odds of a quarter-point reduction to the policy rate by June, according to the CME FedWatch tool.
USD/INR remains capped within a symmetrical triangle
The Indian Rupee trades stronger on the day. The USD/INR pair has consolidated near the lower limit of a symmetrical triangle on the daily chart. The constructive view of the pair remains in place, with the price holding above the key 100-day Exponential Moving Average (EMA). However, further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) stands above the midline, suggesting neutral momentum in the near term.
The immediate resistance level for USD/INR emerges at 87.24, the upper boundary of a symmetrical triangle. Sustained gain above this level could pave the way to 87.53, the high of February 28, en route to an all-time high of 88.00.
On the flip side, a decisive break below the low of March 6 and the lower limit of the triangle pattern at 86.86 could expose 86.48, the low of February 21. Further south, the additional downside filter to watch is 86.14, the low of January 27.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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