USD/INR gains as US tariff issues offset impact of India's GST reforms
- The Indian Rupee trades lower against the US Dollar despite the Indian administration revealing a new GST framework.
- India revises GST tax slabs from four to two.
- Investors await the US ADP Employment and ISM Services PMI data.
The Indian Rupee (INR) drops against the US Dollar (USD) on Thursday to near 88.30, even as the Indian government revises Goods and Services Tax (GST) rates lower to boost consumption.
In late Indian Standard Time (IST) hours on Wednesday, India’s Finance Minister Nirmala Sitharaman confirmed, after the 56th GST council meeting, that the government will bring down the four-tier tax framework to two, in which there will be only 5% and 18% slabs, and 12% and 28% tax brackets will be abolished. The administration has introduced a 40% tax slab for luxury items to offset the loss of revenues from the new two-tier framework.
India’s FM Sitharaman also announced that the new GST framework will become effective from September 22, which aims to provide financial support to common man and middle-class families of the country.
Lower taxes on discretionary and non-discretionary items would leave more money in the hands of the public, a move that would boost consumption and investment in the economy. Such a scenario could prove to be inflationary for the economy, a move that might restrict the Reserve Bank of India (RBI) from reducing interest rates again in the remainder of the year.
Meanwhile, the consistent outflow of foreign funds from Indian stock markets continues to be a major drag on the Indian Rupee. Foreign Institutional Investors (FIIs) have remained net sellers in all three trading days of September. However, the pace of selling appears to be moderate than what was seen in July and August. On Wednesday, FIIs pared stake worth Rs. 1,666.46 crores from the Indian equity markets.
The table below shows the percentage change of Indian Rupee (INR) against listed major currencies today. Indian Rupee was the weakest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | INR | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.03% | 0.07% | 0.03% | 0.13% | 0.22% | 0.09% | 0.03% | |
| EUR | -0.03% | 0.05% | 0.02% | 0.10% | 0.25% | 0.08% | -0.04% | |
| GBP | -0.07% | -0.05% | 0.04% | 0.04% | 0.19% | 0.00% | -0.10% | |
| JPY | -0.03% | -0.02% | -0.04% | 0.08% | 0.11% | 0.04% | -0.00% | |
| CAD | -0.13% | -0.10% | -0.04% | -0.08% | 0.06% | 0.02% | -0.14% | |
| AUD | -0.22% | -0.25% | -0.19% | -0.11% | -0.06% | -0.15% | -0.28% | |
| INR | -0.09% | -0.08% | 0.00% | -0.04% | -0.02% | 0.15% | -0.08% | |
| CHF | -0.03% | 0.04% | 0.10% | 0.00% | 0.14% | 0.28% | 0.08% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Indian Rupee from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent INR (base)/USD (quote).
Investors expect a moderate growth in US private sector employment data
- A slight downside move in the USD/INR pair is also driven by some correction in the US Dollar on the back of weak United States (US) JOLTS Job Openings data for July published on Wednesday. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades calmly close to Wednesday’s low around 98.00.
- The Bureau of Labor Statistics (BLS) showed that US employers posted 7.18 million fresh jobs, lower than expectations of 7.4 million and the prior reading of 7.36 million. Lower job postings signify a soft labor market, a scenario that allows traders to raise bets supporting interest rate cuts by the Federal Reserve (Fed).
- According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September policy meeting has increased to 97.6% from 92% seen before the JOLTS Job Openings data release.
- This week, the major trigger for the US Dollar will be the Nonfarm Payrolls (NFP) data for August, which will be released on Friday. Investors will pay close attention to the official employment data as it intensified Fed dovish bets after the release of July’s report, which showed a significant downward revision in May and June’s payrolls data.
- In Thursday’s session, investors will closely monitor the ADP Employment Change and ISM Services Purchasing Managers’ Index (PMI) data for August. The ADP is expected to show that the US private sector hired 65K new workers, significantly lower than 104K in July. Meanwhile, the ISM Services PMI is seen at 51.0, higher than the prior release of 50.1.
Technical Analysis: USD/INR is expected to extend upside to near 89.00
The USD/INR pair rises to near 88.30 on Thursday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 87.73.
The 14-day Relative Strength Index (RSI) trades calmly above 60.00, suggesting that a fresh bullish momentum has come into effect.
Looking down, the 20-day will act as key support for the major. On the upside, the round figure of 89.00 would be the key hurdle for the pair.
Indian economy FAQs
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.
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.
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.
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.
