USD/INR drifts higher on concerns over US tariffs, global trade war
- The Indian Rupee weakens in Tuesday’s early European session.
- Persistent US dollar demand and unabated outflow of foreign funds weigh on the INR.
- Indian and US CPI inflation reports will take center stage on Wednesday.
The Indian Rupee (INR) extends the decline on Tuesday, pressured by strong US Dollar (USD) demand by importers. Maturities in the non-deliverable forwards (NDF) market also exert some selling pressure on the local currency that has been hit by foreign fund sales of local equities since late September. The uncertainty caused by US President Donald Trump’s tariff policy might impact emerging market currencies like the INR.
Nonetheless, any significant depreciation of the local currency might be limited due to the foreign exchange intervention from the Reserve Bank of India (RBI). Furthermore, a decline in crude oil prices might help limit the INR’s losses as India is the world's third-largest oil consumer.
In the absence of top-tier economic data releases from the United States and India on Tuesday, the USD/INR pair will be driven by the Greenback. The Indian and US Consumer Price Index (CPI) inflation reports for February will be the highlights on Wednesday.
Indian Rupee softens amid portfolio outflows and global factors
- "The rupee weakened because of an increase in dollar demand from oil companies, as Indian companies have started buying oil from the US," a trader at a private bank said.
- Foreign investors have withdrawn almost $15 billion from Indian shares so far this year, putting outflows on track to surpass the record $17 billion registered in 2022. The selloff has wiped out $1.3 trillion from India’s market value.
- Trump declined on Sunday to predict whether the US could face a recession amid stock market concerns about his tariff actions on Mexico, Canada and China.
- The US Nonfarm Payrolls (NFP) came in weaker than the expectation, rising by 151K in February versus 125K prior (revised from 143K). Meanwhile, the Unemployment Rate ticked higher to 4.1% in February from 4.0% in January.
- Fed Chair Jerome Powell said on Friday that the US central bank can remain patient in adjusting its benchmark interest rate, citing uncertainty around the potential impact of Trump's policies.
- Traders are now pricing in 75 basis points (bps) of cuts from the Fed this year, LSEG data showed, with a rate cut fully priced in for June.
USD/INR retains its bullish bias in the longer term
The Indian Rupee weakens on the day. The bullish bias of the USD/INR pair remains intact, with the price holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. The path of least resistance is to the upside as the 14-day Relative Strength Index (RSI) stands above the midline near 60.0.
The first upside target for USD/INR emerges at 87.53, the high of February 28. Potential bullish candlesticks above the mentioned level could see a rally to an all-time high near 88.00, en route to 88.50.
In the bearish event, the initial support level is located at 86.86, the low of March 6. Any follow-through selling could attract some selling pressure to 86.48, the low of February 21, followed by 86.14, the low of January 27.
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
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.
