USD/INR jumps on Trump's threat through tariffs
- The Indian Rupee remains under selling pressure in Tuesday's early European session.
- The INR declines tracking weaker Chinese Yuan, sustained foreign fund outflows and strong USD demand.
- The Fed rate decision and India’s Federal Fiscal Deficit will be the highlights for this week.
The Indian Rupee (INR) drifts lower on Tuesday as a decline in the Chinese Yuan amid concerns over US President Donald Trump's trade tariffs put pressure on the Asian peers. Additionally, likely equity outflows and a muted trend in domestic equities contribute to the INR’s downside. However, the downside of the Indian Rupee might be limited as the Reserve Bank of India (RBI) will likely intervene in the foreign exchange market to prevent the local currency from significantly depreciating.
The US Federal Reserve (Fed) monetary policy meeting will take center stage on Wednesday. The Fed is widely expected to make no changes to the policy rate at its January meeting, but traders will take more cues from the Press Conference for guidance for policy action in March. On the Indian docket, the Federal Fiscal Deficit will be released on Friday, which might introduce measures to stimulate economic growth.
Indian Rupee remains fragile amid a weak macroeconomic environment
- China and India agreed to resume direct flights between the Chinese mainland and India, support coordination between competent departments of the two countries to advance this goal, and take measures to facilitate personnel exchanges and mutual postings of journalists, per the Global Times.
- "Trump's threat through tariffs and sanctions will concern global trade, and keep emerging market currencies, and thereby the rupee under pressure," said Jigar Trivedi, a senior analyst at Reliance Securities.
- The RBI announced on Monday a host of measures to inject liquidity into the banking system, including bond purchases and dollar/rupee swaps. The Indian central bank's efforts are expected to inject 1.5 trillion rupees ($17.39 billion) into the banking system.
- US President Donald Trump late Monday announced plans to levy tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper.
- US Treasury Secretary Scott Bessent is pushing for new universal tariffs on US imports to start at 2.5% and rise gradually, per the Financial Times. However, Trump said he wants tariffs much larger than 2.5%.
- US New Home Sales rose 3.6% to a seasonally adjusted annual rate of 698,000 units in December from 674,000 units in November, according to the Commerce Department's Census Bureau on Monday. This reading came in better than the estimation of 670,000 units.
USD/INR keeps the bullish vibe in the longer term
The Indian Rupee trades a weaker note on the day. The strong uptrend of the USD/INR pair prevails as the price has broken above the descending triangle pattern while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. The 14-day Relative Strength Index (RSI) stands above the midline near 63.20, suggesting that further upside looks favorable.
The all-time high of 86.69 appears to be a tough nut to crack for bulls. A bullish breakout above this level could pave the way to the 87.00 psychological mark.
If more bearish candlesticks show up, we could see a drop to 86.14, the low of January 24. A breach of the mentioned level could expose 85.85, the low of January 10. The additional downside filter to watch is 85.65, the low of January 7.
RBI FAQs
The role of the Reserve Bank of India (RBI), in its own words, is "..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.
The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.
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.
