Indian Rupee regains ground despite higher oil prices

The Indian Rupee rises against the US Dollar even as oil prices remain higher.
US President Trump confirmed that the MoU with Iran is over.
Hawkish FOMC minutes fail to support the US Dollar.

Sagar Dua FXStreet

The Indian Rupee (INR) opens higher against the US Dollar (USD) on Thursday. The USD/INR pair drops to near 95.40 as the US Dollar ticks lower; however, the outlook of the pair remains bullish as renewed Middle East hostilities have boosted oil prices.

The higher oil prices narrative is unfavorable for the Indian Rupee, as currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, tend to underperform in a high-oil-price environment.

In the opening trade, the MCX Crude Oil contract expiring on July 20 holds onto Wednesday’s gains near Rs.7,115. The MCX Crude Oil contract has gained over 10% from its multi-month low of Rs. 6,505 posted last week.

Trump says US-Iran MoU is over

On Wednesday, United States (US) President Donald Trump announced that the memorandum of understanding (MoU) signed with Iran, aimed at ending the Middle East war, is over, after the exchange of attacks between both nations. The US Central Command launched a series of attacks on Iran’s military infrastructure on Tuesday after Tehran struck three commercial ships transiting through the Strait of Hormuz, a critical chokepoint to almost 20% of global energy supply.

Meanwhile, Middle East hostilities have increased as US military forces have started attacking Iranian infrastructure. Earlier in the day, Iranian state media reported that multiple US artillery shells struck a railway bridge west of Aghala in Golestan, triggering several explosions.

Hawkish FOMC minutes fails to support US Dollar

The US Dollar trades marginally lower even as Federal Open Market Committee (FOMC) Minutes of the June policy meeting on Wednesday showed that policymakers continue to see “inflation as the dominant risk”. The minutes also showed that several officials believe further tightening could become necessary.

At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is down 0.25% to near 100.80.

FIIs continue to raise stake in Indian stock market

Foreign Institutional Investors (FIIs) continue to increase their stake in the Indian stock market despite renewed geopolitical risks. Overseas investors have remained net buyers in all last four trading days, and have raised their stake worth Rs. 3,954.35 crore.

Technical Analysis: USD/INR remains supported by 20-day EMA

USD/INR trades lower at around 95.40 at press time. However, the pair holds a bullish near-term bias as spot hovers above the 20-day exponential moving average (EMA) at 95.10. The pair is also holding the breakout of the Descending Triangle formation, while the Relative Strength Index (RSI) at 54.7 hints at moderately positive momentum rather than overbought conditions.

On the downside, initial support is seen at the 20-day EMA around 95.10, followed by the May 7 low at 94.03. On the topside, the next significant obstacle aligns with the descending resistance trendline starting near 97.08, which caps the broader advance and would need to be overcome to sustain a stronger bullish extension.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Indian economy FAQs

How does the Indian economy impact the Indian Rupee?

The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.

What is the impact of Oil prices on the Rupee?

India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.

How does inflation in India impact the Rupee?

Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.

How does seasonal US Dollar demand from importers and banks impact the Rupee?

India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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