- Indian Rupee gains ground in Monday’s early European session.
- Rising foreign inflows and lower crude oil prices support the INR.
- Concerns over geopolitical tensions between India and Pakistan might cap the Indian Rupee’s upside.
The Indian Rupee (INR) gathers strength on Monday. Foreign Portfolio Investors (FPIs) continue to buy Indian equities for the seventh consecutive day. This, in turn, could boost the local currency against the Greenback in the near term. Furthermore, the decline in Crude oil prices contribute to the INR’s upside, as India is the third largest consumer of crude oil in the world.
On the other hand, rising tension with Pakistan could trigger a risk-off sentiment among traders, which might drag the Indian currency lower. The ceasefire violation along the Line of Control (LoC) came days after the Pahalgam terror attack, which killed 26 people, mostly tourists, in the Baisaran valley near Pahalgam, Jammu and Kashmir.
The US Dallas Fed Manufacturing Business Index for April will be published later on Monday. The preliminary reading of US Gross Domestic Product (GDP) for the first quarter (Q1) will be in the spotlight on Wednesday ahead of the US Nonfarm Payrolls (NFP) report, which is due later on Friday.
Indian Rupee trades stronger despite India-Pakistan tensions
- Tensions between India and Pakistan are rising after Pakistan violated a ceasefire across the LoC after the Pahalgam terror attack. On Thursday night, hours after suspending the Simla Agreement of 1971, the Pakistan Army breached the truce along the LoC and began firing at various sites. The Indian Army has responded "effectively."
- The Reserve Bank of India is expected to cut the Repo Rate to 5.50% by end-Q3 (vs. 5.75% in March poll), according to the Reuters poll.
- US Agriculture Secretary Brooke Rollins said on Sunday that the Trump administration is having daily conversations with China over tariffs, per Reuters. Rollins added that there were ongoing talks between the two nations and that trade deals with other nations were “very close.”
US President Donald Trump said on Friday that the US will be reasonable on tariffs, adding that markets are adjusting to tariff policy. - The University of Michigan (UoM) Consumer Sentiment in April rose to 52.2 from 50.8 in the previous reading, better than the estimation of 50.8. Consumers’ inflation expectations for one year eased to 6.5% in April versus 6.7% prior.
USD/INR’s outlook remains bearish under the 100-day EMA
The Indian Rupee trades firmer on the day. The negative outlook of the USD/INR pair remains intact, characterized by the price holding below the key 100-day Exponential Moving Average (EMA) on the daily chart. Additionally, the 14-day Relative Strength Index (RSI) stands below the midline near 41.00, supporting the sellers in the near term.
The lower limit of the descending trend channel at 84.80 acts as an initial support level for USD/INR. Extended losses could see a drop to 84.22, the low of November 25, 2024. Further south, the additional downside filter to watch is 84.08, the low of November 6, 2024.
In the bullish case, the first upside barrier is located at 85.80, the 100-day EMA. If the pair breaks above this level, it could draw in more bullish pressure and push the pair toward 86.35, the upper boundary of the trend channel.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
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