USD/INR weakens as fresh tax reforms lift markets
- The Indian Rupee drifts higher in Tuesday’s early European session.
- New tax measures rolled out by PM Modi’s government support the INR, but global uncertainty might cap its upside.
- Traders await the flash Indian HSBC PMI data on Thursday ahead of the Jackson Hole Economic Policy Symposium.
The Indian Rupee (INR) gathers strength on Tuesday. Indian Prime Minister Narendra Modi unveiled plans for the biggest tax overhaul since 2017 over the weekend, boosting stocks across sectors like automobile, financial services, real estate, consumer, and cement. A likely rally in Indian equities after sweeping tax reforms might support the Indian currency in the near term.
On the other hand, persistent US–India trade tensions might drag the INR lower. US President Donald Trump said he would delay new tariffs on countries like China that continue purchasing Russian oil after talks with Russian President Vladimir Putin. Nonetheless, his words made no mention of India, which is still set to face an additional 25% duty beginning August 27.
The preliminary reading of the Indian HSBC Purchasing Managers Index (PMI) reports for August will be the highlight on Thursday. On the US docket, traders will closely monitor the Federal Reserve's annual symposium in Jackson Hole later on Friday, as it might offer some guidance on a September interest rate cut after recent US data. Fed Chair Jerome Powell is set to speak on the economic outlook and the central bank's policy framework.
Daily digest market movers: Indian Rupee edged higher amid tax cuts boost
- White House trade adviser Peter Navarro said late Monday that India’s purchases of Russian crude oil are funding Moscow’s war in Ukraine and have to stop, as the US ramps up pressure on India to cut off its energy imports from Russia.
- Trump said that the US would "help out" Europe in providing security for Ukraine as part of any deal to end the war in Ukraine and expressed hope that Monday's talks could eventually lead to a trilateral meeting with Russian President Vladimir Putin, per Reuters.
- Trump noted that negotiations to obtain peace in the years-long war prompted by Russia’s invasion of Ukraine can take place while both countries are still fighting, dropping his earlier calls for a ceasefire.
- S&P upgraded India's rating to BBB, from BBB-, with a stable outlook last week, and said the economy's growth prospects won't be impacted by the Trump administration's 50 percent tariff shock to the country.
- Fed fund futures traders are now pricing in an 83% odds of a September Fed rate cut, after last week briefly fully pricing in a move, according to the CME FedWatch tool.
Technical Analysis: USD/INR maintains a constructive outlook above the 100-day EMA
The Indian Rupee trades in positive territory on the day. However, the USD/INR pair keeps the bullish vibe, with the price being well-supported above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Furthermore, the 14-day Relative Strength Index (RSI) stands above the midline near 56.75, suggesting that the path of least resistance is to the upside.
The first upside barrier for the pair emerges at 87.74, the high of August 8. If we see more green candlesticks and a solid move above the mentioned level, USD/INR could revisit the 88.00-88.05 zone, representing the psychological level and the upper boundary of the ascending trend channel.
In the bearish event, the first support level for USD/INR is located at 87.06, the low of July 30. If the pair sees sustained trading below this level, it could see a drop to a crucial contention level at 86.25, the 100-day EMA, and the lower limit of the trend channel.
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.
