USD/INR eyes lifetime highest closing near 92.80 amid energy supply shocks

USD/INR is expected to close near its lifetime highs around 92.80 on Monday.
Rallying oil prices amid Iran conflicts have weighed heavily on the Indian Rupee.
The US Dollar surges as risk-off trade remains underpinned amid war in the Middle East.

Sagar Dua FXStreet

The USD/INR pair looks all set for its lifetime highest closing at around 92.80 on Monday. The pair trades strongly higher as the Indian Rupee (INR) faces intense selling pressure amid war in the Middle East involving the United States (US), Iran, and Israel, which has spiked oil prices.

WTI futures on NYMEX trade 12% higher to near $100 during the European trade. The oil price rallied in the Asian trade to near $113.00 as aerial attacks on several Iranian depots by the US and Israel, in a joint operation, over the weekend, prompted concerns about energy supply risks.

However, the Oil price has given up a majority of its early gains after reports showed that G7 members and the International Energy Agency (IEA) will discuss releasing emergency oil reserves.

Still, higher oil prices remain a key concern for the Indian Rupee as currencies from nations, such as India, that rely heavily on oil imports to fulfil their energy needs remain highly sensitive to changes in the oil price.

Meanwhile, the Reserve Bank of India’s (RBI) intervention in the foreign exchange market during the opening trade to support the Indian Rupee against one-way excessive moves has failed to weigh on the USD/INR pair. According to a report from Reuters, India’s central bank likely sold US Dollars to support the INR, Reuters report.

In addition to weakness in the Indian Rupee, a higher US Dollar (USD) amid the risk-off market mood has also strengthened the USD/INR pair. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.5% higher to near 99.35.

On the macroeconomic front, investors will focus on the Consumer Price Index (CPI) data for February from both the US and India, which will be released on Wednesday and Thursday, respectively.

(This story was corrected on March 9 at 13:03 GMT to say that rallying oil prices amid Iran conflicts have weighed heavily on the Indian Rupee, not on the US Dollar.)

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

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.

How do the decisions of the Reserve Bank of India impact the Indian 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.

What macroeconomic factors influence the value of the Indian Rupee?

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.

How does inflation impact the Indian 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.

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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