USD/INR strengthens on rising India-Pakistan tensions
- Indian Rupee loses ground in Monday’s Asian session.
- Ceasefire violations keep tensions high between India and Pakistan, weigh on the INR.
- India’s Consumer Price Index for April is due later on Monday.
The Indian Rupee (INR) weakens on Monday, pressured by increasing tensions on the border between the nuclear-armed rivals India and Pakistan. The renewed US Dollar (USD) demand following the optimism between US-China trade talks and a jump in crude oil prices could drag the Indian currency lower.
However, continuing FPI flows into the domestic equity markets and better-than-expected corporate earnings could support the INR. Any significant depreciation of local currency might be limited due to foreign exchange intervention by the Reserve Bank of India (RBI).
Investors will keep an eye on India’s Consumer Price Index for April, which will be released later on Monday. On the US front, Federal Reserve (Fed) Governor Adriana Kugler is scheduled to speak. On Tuesday, the attention will shift to the US April CPI inflation report.
Indian Rupee edges lower as India-Pakistan tensions remain amid ceasefire violations
- India on Saturday accused Pakistan of violating a ceasefire agreement reached earlier the same day between the Directors General of Military Operations (DGMOs) of both nations.
- According to India's Foreign Secretary, Vikram Misri, Indian forces had been directed to give a firm response to any further ceasefire breaches along the Line of Control (LoC) and the international border.
- “An understanding was reached this evening between the DGMOs of India and Pakistan to halt the ongoing military action. However, in the last few hours, Pakistan has violated this understanding,” said Misri.
- The US and China reported “substantial progress” after two days of talks in Switzerland aimed at de-escalating a trade war. China's Vice Premier He Lifeng described trade talks with US officials as “an important first step” in stabilising bilateral trade relations, while US Treasury Secretary Scott Bessent said the two sides made “substantial progress.”
- Swap markets have priced in the Fed’s first 25 basis points (bps) rate cut for the July meeting, and they expect two additional rate reductions towards the end of the year.
USD/INR resumes its uptrend amid a neutral RSI indicator
The Indian Rupee softens on the day. The USD/INR pair resumes its uptrend as the pair crosses above the key 100-day Exponential Moving Average (EMA). Nonetheless, the 14-day Relative Strength Index (RSI) hovers around the midline, suggesting that further consolidation cannot be ruled out.
Sustained upside momentum past the upper boundary of the trend channel at 86.12 could pave the way to 86.61, the high of April 10. The next bullish target to watch is 87.38, the high of March 11.
On the other hand, the 85.00 psychological level acts as an initial support level for USD/INR. A breach of this level could see a drop to 84.53, the low of May 8, followed by 84.12, the low of May 5.
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.