USD/INR holds steady as Trump threatens China with tariffs
- The Indian Rupee trades flat in Wednesday’s Asian session.
- Renewed USD demand and Trump’s tariff announcements might weigh on the INR.
- The routine RBI intervention and lower crude oil prices might cap the downside for local currency.
The Indian Rupee (INR) flat lines on Wednesday. The persistent US Dollar (USD) buying from foreign portfolio investors and local oil companies could weigh on the lNR. Additionally, US President Donald Trump’s plan to impose tariffs on China might exert some selling pressure on Asian peers, including the Indian Rupee.
Nonetheless, the downside for the INR might be limited as the Reserve Bank of India (RBI) could intervene in the foreign exchange market via USD sales to prevent the local currency from significant depreciation. A decline in crude oil prices might also help limit the INR’s losses as India is the world's third-largest oil consumer. Investors will closely monitor the preliminary reading of HSBC India’s Purchasing Managers Index (PMI) and US S&P PMI data for January, which will be published later on Friday.
Indian Rupee looks fragile amid multiple headwinds
- India's GDP is estimated to grow at 6.5-6.8% in the current fiscal year, according to Deloitte India on Tuesday.
- Moody's lowered India's economic growth forecast to 7.0% for the fiscal year ending March 2025, down from 8.2% recorded in the previous fiscal year.
- Overseas investors have sold a net total of about $6.5 billion worth of local equities and bonds in January, the largest monthly outflow since October 2023.
- Trump stated on Tuesday that his administration is discussing imposing a 10% tariff on goods imported from China on February 1 because fentanyl is being sent from China to Mexico and Canada, per Reuters.
USD/INR price action remains constructive in the longer term
The Indian Rupee trades on a flat note on the day. The path of least resistance is to the upside as the USD/INR pair has formed higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. Additionally, the 14-day Relative Strength Index (RSI) is located above the midline near 67.00, indicating bullish momentum in the near term.
The all-time high of 86.69 appears to be a tough nut to crack for bulls. A sustained break above the mentioned level could open the door for a rally toward the 87.00 psychological level.
On the flip side, a move back below 86.18, the low of January 20, could clear the way for a dip to the next support level at 85.85, the low of January 10. The next downside target to watch is 85.65, the low of January 7.
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.