On Tuesday, during the early European trading session, the Indian Rupee (INR) showed signs of weakness. The currency was under pressure due to the backdrop of escalating geopolitical tensions in the Middle East, which led to a hike in crude oil prices. As the world’s third – largest oil consumer, India is particularly vulnerable to such price increases. Higher crude oil prices mean that Indian importers need to shell out more in US Dollars (USD) to secure their oil supplies. This, in turn, increases the demand for USD and puts downward pressure on the INR.
Factors Curbing INR’s Downward Slide
However, there were factors at play that limited the INR’s losses. Foreign banks were seen selling US Dollars, which provided some relief to the INR. This could be part of their strategic portfolio management or an attempt to stabilize currency markets. Additionally, concerns about the US economy’s slowdown, spurred by President Donald Trump administration’s trade policies, influenced the currency dynamics. The uncertainty around US economic growth made the USD less attractive in some quarters. Moreover, the Reserve Bank of India (RBI) was potentially intervening in the foreign exchange market. Historically, the RBI has stepped in to prevent significant currency depreciations, and its actions might have been a stabilizing force for the INR.
Fed Interest Rate Decision in the Spotlight
All eyes are on the Federal Reserve (Fed) as it concludes its two – day meeting on Wednesday. Market participants widely anticipate that the Fed will maintain the status quo, keeping the benchmark interest rate in the range of 4.25% to 4.50%. While the rate decision itself might not be a surprise, the focus will be on the Fed’s policy guidance. Economists are expecting policymakers to project two quarter – percentage – point rate reductions this year in their updated forecasts. This could have far – reaching implications for global currency markets, including the USD/INR pair.
Short – Term Outlook for USD/INR
Amit Pabari, the managing director of CR Forex Advisors, shared his insights on the USD/INR pair. He stated that, given the current market sentiment, the pair is likely to trade within the 86.80 – 87.40 range in the near to medium term. A breakout beyond this range could trigger an additional movement of 30 – 50 paise in the same direction. This has put market participants on high alert, as such volatility can present both risks and opportunities for investors.
Economic Data Influencing the Pair
Recent economic data from both India and the US also played a role in shaping the USD/INR dynamics. India’s Wholesale Price Index (WPI) inflation rose to 2.38% in February, exceeding the previous reading of 2.31% and market expectations of 2.36%. In the US, retail sales figures released on Monday showed a 0.2% month – on – month increase in February. However, this was weaker than the market – expected 0.7% rise. On a year – on – year basis, retail sales climbed 3.1% in February, compared to a revised 3.9% in the prior period. According to the CME FedWatch tool, markets have priced in nearly a 75% chance of a quarter – point reduction in the policy rate by June.
Technical Analysis of USD/INR
From a technical perspective, the USD/INR pair has broken out of a symmetrical triangle on the daily chart. In the long term, the uptrend remains intact as the price is above the key 100 – day Exponential Moving Average (EMA). However, in the short term, the outlook seems bearish for the INR. The 14 – day Relative Strength Index (RSI) is below the midline at around 43.65. On the upside, the first resistance level for USD/INR is near 86.90, a level that previously acted as support. A rally above this level could potentially see the pair reach 87.38, the March 11 high, and then aim for 87.53, the February 28 high. On the downside, the initial support level is at 86.48, the February 21 low. A drop below this level could open the door for a move towards 86.14, the January 27 low.
FAQs on Indian Economy and INR
How the Indian Economy Affects the Rupee
The Indian economy has been growing at an average rate of 6.13% between 2006 and 2023, making it one of the fastest – growing economies globally. This growth has attracted substantial foreign investment, including Foreign Direct Investment (FDI) in physical projects and Foreign Indirect Investment (FII) in Indian financial markets. Higher investment levels lead to increased demand for the Rupee. At the same time, fluctuations in the demand for dollars from Indian importers also impact the INR.
Impact of Oil Prices on the Rupee
India imports a significant portion of its oil and gasoline requirements. Since oil is predominantly traded in US Dollars on international markets, a rise in oil prices increases the aggregate demand for USD. Indian importers then have to sell more Rupees to meet this demand, causing the Rupee to depreciate.
Influence of Indian Inflation on the Rupee
Inflation has a complex relationship with the Rupee. Generally, it indicates an increase in the money supply, which reduces the Rupee’s overall value. However, if inflation rises above the RBI’s 4% target, the RBI may raise interest rates to control it. Higher interest rates, especially real rates, make India a more attractive destination for international investors, strengthening the Rupee. Conversely, a fall in inflation can also support the Rupee, while lower interest rates may have a depreciatory effect.
Effect of Seasonal USD Demand on the Rupee
India has a long – standing trade deficit, meaning its imports exceed its exports. As most international trade is conducted in US Dollars, there are periods of high USD demand due to seasonal factors or order surges. During these times, the Rupee weakens as it is sold in large volumes to obtain dollars. Increased market volatility can also lead to a spike in USD demand, negatively impacting the Rupee.
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