USD/INR extends upside as escalation fears prompt risk-off move

Indian Rupee edges lower in Thursday’s early European session.
The risk-off sentiment and higher crude oil prices drag the INR lower.
Investors await the US September ISM Services PMI on Thursday ahead of employment data.

Lallalit Srijandorn FXStreet

The Indian Rupee (INR) softens on the day, pressured by the renewed US Dollar (USD) demand. The risk-off mood amid the escalating geopolitical tensions in the Middle East boosts the safe-haven flows, benefiting the Greenback. Additionally, the rise in crude oil prices exerts some selling pressure on the INR as India is the third-largest oil consumer after the United States (US) and China.

Looking ahead, investors will keep an eye on the US September ISM Services Purchasing Managers Index (PMI), the weekly Initial Jobless Claims and the final S&P Global Services PMI, which are due later on Thursday. The attention will shift to the US September employment data on Friday, including Nonfarm Payrolls (NFP), Unemployment Rate and the Average Hourly Earnings. If the jobs report showed a weaker-than-expected outcome, this could prompt the central bank to consider cutting rates deeper, which might exert some selling pressure on the USD.

Daily Digest Market Movers: Indian Rupee remains vulnerable amid multiple headwinds

The HSBC final India Manufacturing PMI eased to an eight-month low of 56.5 in September. This figure was below the market consensus of 56.7 and the previous reading of 57.5.
"Momentum in India's manufacturing sector softened in September from the very strong growth in the summer months," said Pranjul Bhandari, chief India economist at HSBC.
According to the Reserve Bank of India’s (RBI) real effective exchange rate (REER) index, the Indian Rupee stood at 5.5% above its fair value in August, down from 7.7% in the previous month.
The US ADP Employment Change data for September exceeded expectations, with 143,000 new jobs added. This figure was above the median forecast of 120,000 and the previous reading of 103,000 (revised from 99,000).
Richmond Fed President Thomas Barkin said on Wednesday that the Fed's fight to return inflation to its 2% target may take longer than expected to complete and limit how far interest rates can be cut, per Reuters.

Technical Analysis: USD/INR maintains its constructive bias

The Indian Rupee softens on the day. According to the daily timeframe, the positive view of the USD/INR pair prevails as the price holds above the key 100-day Exponential Moving Average (EMA). Furthermore, the 14-day Relative Strength Index (RSI) crosses above the midline near 60.30, suggesting that the uptrend is more likely to resume than to reverse.

The crucial resistance level for the pair emerges at the 84.00 psychological mark. Sustained bullish momentum above this level could pave the way to 84.15, the high of August 5. The next upside barrier is seen at 84.50.

On the flip side, the initial support level for USD/INR is seen at 83.80, the low of October 1. A break lower could drag the pair further south to the 100-day EMA at 83.64, followed by 83.00, representing the round mark and the low of May 24.

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.

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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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