USD/INR drifts higher on global trade concerns, US PMI data in focus

The Indian Rupee trades in negative territory in Tuesday’s early European session.
Fears of a global trade war triggered by Trump's looming tariffs weigh on the INR.
The US March ISM Manufacturing PMI report will take center stage later on Tuesday.

Lallalit Srijandorn FXStreet

The Indian Rupee (INR) softens on Tuesday, pressured by renewed US Dollar (USD) demand. Traders grow risk-averse ahead of US trade tariffs expected to be unveiled on Wednesday, which weighs on the local currency. Additionally, a rise in crude oil prices contributes to the INR’s downside as India is the world's third-largest oil consumer.

On the other hand, easing domestic inflation and the resumption of foreign inflows into stocks and bonds might help limit the Indian currency’s losses. Traders brace for the US March ISM Manufacturing Purchasing Managers Index (PMI) data, which is due later on Tuesday. Also, the JOLTS Job Openings, the final S&P Global Manufacturing PMI will be published.

Indian Rupee softens amid global uncertainties

India's economy is set to grow at a rate of 6.5% in the fiscal year 2025-26, continuing its steady growth momentum, aligning with the revised estimates of the National Statistical Office (NSO).
According to EY Economy Watch, India’s economy is projected to grow 6.5% in the fiscal year 2025-26.
US President Donald Trump said late Monday that his reciprocal tariffs plan will target all other countries when they are unveiled Wednesday, adding more uncertainty to the much-anticipated trade policy just days before its implementation.
Trump pushed back on the possibility that the fresh tariffs will target just the top 10 or 15 trade partners that have their own import duties on US goods.
Federal Reserve Bank of Richmond President Tom Barkin said late Monday that the US central bank would need to have confidence that inflation will move down before cutting the interest rates again, per Bloomberg.
New York Fed President John Williams noted that the policy is in a good position to navigate through uncertainties, despite potential risks of higher inflation.

USD/INR paints a negative picture, oversold RSI warrants caution for bears

The Indian Rupee trades on a softer note on the day. The bearish outlook of the USD/INR pair remains in play as the price is below the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The downward momentum is supported by the Relative Strength Index (RSI), which stands below the midline. Nonetheless, the oversold RSI condition indicates that further consolidation or temporary recovery cannot be ruled out before positioning for any near-term USD/INR depreciation.

The initial support level for the pair is located at the 85.00 psychological mark. Any follow-through selling below the mentioned level could see a drop to 84.84, the low of December 19, followed by 84.22, the low of November 25, 2024.

On the bright side, the crucial resistance level for USD/INR is seen at the 85.90-86.00 region, representing the 100-day EMA and round mark. Sustained trading above this level could pave the way to 86.48, the low of February 21, en route to 87.00, the round figure.

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.

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Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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