USD/INR trades weaker, eyes on Indian Services PMI, RBI rate decision

  • Indian Rupee gains traction on the softer USD, upbeat Indian growth number.
  • The Reserve Bank of India (RBI) is likely to maintain the status quo on the rate in its policy meeting this week.
  • Market players will monitor the S&P Global India Services PMI ahead of the RBI interest rate decision.

The Indian Rupee (INR) kicks off the week in a positive mood on the weaker US Dollar (USD) on Monday. The investor inflow and the stronger Indian growth figure prompted economists to raise their growth forecasts for Asia's third-largest economy. India's second-quarter Gross Domestic Product (GDP) expanded 7.6% driven by robust manufacturing performance and government spending, according to the statistics ministry last week.

The Reserve Bank of India (RBI) monetary policy committee will hold its next policy meeting on December 6–8. The markets anticipate the RBI to stand pat on rates and maintain a hawkish stance amid upbeat growth and upside risks to near-term inflation on account of food prices.

Additionally, the results of the state elections are likely to be welcomed by investors and financial markets as they alleviate political uncertainty and concerns about large-scale fiscal populism ahead of the national elections.

Looking ahead, the S&P Global India Services PMI for November will be released on Tuesday. The figure is estimated to ease from 58.4 to 58.0. Investors will closely watch the RBI interest rate decision on Friday, which is expected to maintain the rate unchanged at 6.50%.

Daily Digest Market Movers: Indian Rupee gains momentum amid challenging global economic conditions

  • Prime Minister Narendra Modi's Bharatiya Janata Party looks likely to form governments in three of the five Indian states that recently held elections.
  • Krishnamurthy V. Subramanian, Executive Director of the International Monetary Fund (IMF) forecasted a 7 % Indian growth for the ongoing financial year.
  • India's NIFTY 50 reached an all-time high on Friday following the upbeat economic growth in the September quarter, which spurred confidence in the Indian economy.
  • India’s second-quarter Gross Domestic Product grew 7.6%, marking her the world’s fastest-growing major economy, driven by manufacturing and the government's spending.
  • Indian Prime Minister Narendra Modi said the upbeat GDP growth numbers highlighted the Indian economy's resilience and strength in the face of global challenges.
  • US ISM Manufacturing PMI came in weaker than expected and remained unchanged at 46.7 in November.
  • The Manufacturing Employment Index eased from 46.8 to 45.8 in November. Prices Paid improved from 45.1 to 49.9. Finally, the New Orders Index rose to 48.3 in November from 45.5 in the previous reading.
  • According to the CME FedWatch Tool, markets are now pricing in more than 50% odds of a rate cut in the first quarter of 2024.

Technical Analysis: Indian Rupee’s bullish outlook remains in place

Indian Rupee edges lower on the day. The USD/INR pair has traded within a familiar multi-month-old trading band of 82.80–83.40. According to the daily chart, the bullish bias of USD/INR stays intact despite the latest pullback as it holds above the key 100-day Exponential Moving Average (EMA) with an upward slope. However, the 14-day Relative Strength Index (RSI) dropped below the 50.0 midline, indicating that further downside cannot be ruled out.

That being said, the first upside barrier for USD/INR bulls is seen at 83.40, portraying the upper boundary of the trading range. A decisive break above 83.40 will pave the way to the year-to-date (YTD) high of 83.47, en route to a psychological round figure of 84.00. On the other hand, the key support level is located at the 83.00 psychological mark. The additional downside filter to watch is the confluence of the lower limit of the trading range and a low of September 12 at 82.80, and finally a low of August 11 at 82.60.

US Dollar price in the last 7 days

The table below shows the percentage change of US Dollar (USD) against listed major currencies in the last 7 days. US Dollar was the weakest against the Japanese Yen.

USD   0.62% -0.63% -0.81% -1.11% -1.97% -1.80% -1.31%
EUR -0.63%   -1.27% -1.44% -1.74% -2.61% -2.43% -1.96%
GBP 0.63% 1.24%   -0.18% -0.47% -1.32% -1.16% -0.68%
CAD 0.81% 1.40% 0.17%   -0.29% -1.15% -0.98% -0.50%
AUD 1.07% 1.71% 0.47% 0.30%   -0.85% -0.68% -0.20%
JPY 1.92% 2.52% 1.22% 1.12% 0.83%   0.15% 0.63%
NZD 1.77% 2.38% 1.15% 0.97% 0.68% -0.16%   0.48%
CHF 1.30% 1.91% 0.68% 0.51% 0.21% -0.63% -0.46%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).


What is the role of the Reserve Bank of India?

The role of the Reserve Bank of India (RBI), in its own words, is " 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.

How do the decisions of the Reserve Bank of India affect the Rupee?

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.

Does the Reserve Bank of India directly intervene in FX markets?

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.

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