USD/INR Gains Momentum Amid Anticipation of Fed Rate Decision

On Wednesday’s early Asian trading session, the Indian Rupee (INR) experienced a softening trend. This came after it had reached a more-than-three-week high in the previous session. The currency’s decline can be attributed to multiple factors, with geopolitical risks and tariff threats from US President Donald Trump being the primary culprits.

Geopolitical Tensions and Tariff Threats Weigh on INR

The ongoing geopolitical tensions in the Middle East are casting a shadow over the Indian currency. These tensions have the potential to disrupt global trade and energy markets, which in turn impacts India, a major importer of oil. Additionally, Trump’s proposed reciprocal tariffs set to take effect on April 2 add to the INR’s woes. The looming tariffs are expected to create selling pressure on the currency in the near term.

Weaker Dollar and Other Factors Offer Some Support

However, there are factors that could potentially limit the INR’s losses. The US Dollar, which has been broadly weak, may provide some relief to the Indian Rupee. An uptick in exporter US Dollar (USD) sales also offers a glimmer of hope for the local currency. Moreover, India’s current account data for February, which showed a surplus, is a positive sign and could contribute to the INR’s upward movement.

All Eyes on Fed Rate Decision

The Federal Reserve’s (Fed) interest rate decision on Wednesday is the main event in the financial world. Market participants widely expect the Fed to keep interest rates steady. But it’s not just the rate decision that investors are watching. The Press Conference and Summary of Economic Projections (SEP), also known as the ‘dot-plot’, will be closely monitored. These elements could offer crucial insights into the Fed’s views on the economy and potentially hint at the future path of interest rates.

Key Economic Data Released

In the lead-up to the Fed’s decision, several important economic data were released. India’s Wholesale Price Index (WPI) inflation rose to 2.38% in February from 2.31% in January, exceeding the estimated 2.36%, as reported by the Ministry of Commerce and Industry on Monday. In the US, the Federal Reserve reported that Industrial Production rose by 0.7% month – over – month in February, better than the market expectation of 0.2% and an upward revision from the prior 0.3% (originally reported as 0.5%). Building permits in the US fell by 1.2% to a seasonally adjusted annualized rate of 1.456 million in February, slightly higher than the market expectation of 1.450 million, marking the biggest drop in five months. Meanwhile, US Housing Starts jumped by 11.2% to an annual rate of 1.501 million in February after a sharp decline of 11.5% to a revised rate of 1.350 million in January. According to the CME FedWatch Tool, the odds of a rate cut at the May meeting have increased to 25% from 18% a month ago.

USD/INR Outlook: Long – Term Bullish, Short – Term Uncertain

In the long term, the USD/INR pair maintains a bullish outlook on the daily chart. The price is holding above the key 100 – day Exponential Moving Average (EMA). However, in the short term, the pair has broken out of a symmetrical triangle. The 14 – day Relative Strength Index (RSI) stands below the midline near 42.60, indicating that there is a possibility of further downward movement.

Resistance and Support Levels

The key resistance level for USD/INR is around the psychological level of 87.00. If the pair can consistently trade above this level, it could potentially climb to 87.38, the high of March 11, and then on to 87.53, the high of February 28. On the flip side, the initial support level is at 86.48, the low of March 18. A breach of this level might open the door for a move towards 86.14, the low of January 27, followed by 85.60, the low of January 6.

Indian Rupee: Key Influencing Factors

External and Internal Factors Impacting INR

The Indian Rupee is highly sensitive to various external and internal factors. Externally, the price of crude oil plays a significant role as India is heavily reliant on imported oil. The value of the US Dollar, in which most of India’s trade is conducted, and the level of foreign investment also have a major impact. Internally, the Reserve Bank of India’s (RBI) direct intervention in the foreign exchange markets to maintain a stable exchange rate and the interest rates set by the RBI are crucial determinants of the Rupee’s value.

RBI’s Decisions and Their Impact

The RBI actively intervenes in the forex markets to ensure a stable exchange rate, which is vital for facilitating trade. Additionally, the central bank aims to keep the inflation rate at its 4% target by adjusting interest rates. Higher interest rates generally strengthen the Rupee. This is because of the ‘carry trade’ phenomenon, where investors borrow in countries with lower interest rates and invest in countries with relatively higher interest rates to profit from the difference.

Macroeconomic Influences

Macroeconomic factors such as inflation, interest rates, the economic growth rate (GDP), the balance of trade, and foreign investment inflows all influence the value of the Rupee. A higher GDP growth rate can attract more overseas investment, increasing the demand for the Rupee. A more favorable balance of trade can also lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates minus inflation), are positive for the currency. A risk – on environment often results in greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which benefits the Rupee.

Inflation’s Dual Impact

Inflation has a complex impact on the Indian Rupee. Higher inflation, especially if it is higher compared to India’s peers, is generally negative for the currency as it can signal devaluation due to oversupply. It also increases the cost of exports, leading to more Rupees being sold to buy foreign imports, which weakens the currency. However, higher inflation usually prompts the RBI to raise interest rates, which can attract international investors and strengthen the Rupee. Conversely, lower inflation has the opposite effects.