USD/INR gathers strength on month-end US Dollar demand, eyes on Fed rate decision
- The Indian Rupee softens in Wednesday’s early European session.
- The concerns about Trump's tariffs and equity outflows weigh on the INR, but RBI intervention could help contain excessive losses.
- The Fed monetary policy meeting will be closely monitored later on Wednesday.
The Indian Rupee (INR) edges lower on Wednesday, pressured by strong US Dollar (USD) bids related to importers' month-end payments. The local currency remains on the defensive amid renewed concerns about trade tariffs from US President Donald Trump, along with the sustained foreign fund outflows. Nonetheless, the routine foreign exchange intervention from the Reserve Bank of India (RBI) might help limit the INR’s losses.
The US Federal Reserve (Fed) interest rate decision will be in the spotlight later on Wednesday, with no change in rate expected. Investors will closely monitor Fed Chair Jerome Powell’s press conference as it might offer additional insights into the monetary policy outlook. The cautious stance from the Fed officials could provide some support to the Greenback and act as a headwind for the pair. On the Indian docket, the Federal Fiscal Deficit will take center stage on Friday.
Indian Rupee weakens amid Trump’s tariff threats
- India must shift away from its dependence on raw material exports and focus on further expanding its manufacturing sector to boost economic growth, said Indian Prime Minister Narendra Modi.
- "Malaysia, Singapore and India stand out as the economies within Emerging Asia where these critical products might account for significant proportions of their shipments to the U.S., followed by Taiwan, the Philippines, Thailand and Korea," Barclays said in a note.
- Late Tuesday, US President Donald Trump's press secretary, Karoline Leavitt, said that the plan to impose Canada and Mexico with punishing tariffs on February 1 is still in play.
- The Durable Goods Orders in the US declined by 2.2%, or $6.3 billion, in December to $276.1 billion, according to the US Census Bureau on Tuesday. This reading followed a 2% decrease reported in November and came in worse than the market expectation for an increase of 0.8%.
- Market pricing is pointing to a near 100% certainty that the Fed will keep the policy rate in a target range of 4.25%-4.50%, according to the CME FedWatch tool.
USD/INR maintains its constructive bias in the longer term
The Indian Rupee trades a weaker note on the day. The USD/INR pair keeps the bullish vibe on the daily timeframe as the price has broken above the descending triangle pattern while being well-supported above the key 100-day Exponential Moving Average (EMA). The upward momentum is confirmed by the 14-day Relative Strength Index (RSI), which is located above the midline near 65.30, indicating that further upside cannot be ruled out.
The key resistance level for USD/INR emerges at an all-time high of 86.69. Sustained trading above the mentioned level could see a rally to the 87.00 psychological mark.
In the bearish event, the initial support level is seen at 86.31, the low of January 28. A breach of this level could pave the way to 86.14, the low of January 24. Further south, the next contention to watch is 85.85, the low of January 10.
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.
