USD/INR pares earlier gains after softer US PPI data for May

USD/INR edges slightly higher on Thursday after a four-day losing streak..
US tariff threats make a comeback as US President Trump threatens to send letters to trading partners outlining the terms of trade.
Rising probabilities of a Fed rate cut in September could weigh on the USD and help limit further USD/INR gains.

Tammy Da Costa, CFTe®FXStreet

The Indian Rupee (INR) recovers some of the initial losses against the US Dollar (USD) ahead of the American session on Thursday as markets digest the latest release of the US Producer Price Index (PPI) report for May. Still, the USD/INR pair edges higher on the day, trading above 85.50 at the time of writing after four consecutive days of losses,

The PPI, coming in overall softer than expected, helps reaffirm expectations that the Federal Reserve (Fed) may cut the interest rate in September.

The headline PPI figure for May came in at 2.6% (YoY), in line with expectations and slightly higher than the revised 2.5% reading in April. Meanwhile, the core PPI figure, which excludes food and energy prices, printed at 3%, below the 3.1% forecast and down from 3.2% in April.

Following a softer US Consumer Price Index (CPI) report on Wednesday, which showed signs of easing inflation in the US, expectations for a Fed interest rate cut in September have increased. Since the Fed has maintained a restrictive monetary policy stance relative to other central banks throughout the year, prospects of lower interest rates make the USD less attractive, limiting the USD/INR advance.

For emerging market currencies, such as the Indian Rupee, this presents an opportunity to capitalize on the higher yield differentials found in developing nations.

An additional catalyst for the USD/INR pair is the reemergence of tariff threats, which came into focus after US President Donald Trump stated on Wednesday that letters would soon be sent to its global peers.

Reuters reported on the comments, which included remarks such as, "We're rocking in terms of deals," and "We're dealing with quite a few countries and they all want to make a deal with us." This was followed by his statement that "At a certain point, we're just going to send letters out ... saying, 'This is the deal. You can take it, or you can leave it.'".

The combination of easing inflation in the US and trade uncertainty due to Trump’s tariffs is viewed as an additional threat to the USD, supporting the use of alternative currencies. However, despite the broad-based USD weakness, USD/INR has failed to gain traction below the psychological level of 85.00 and slightly recovers on Thursday.

Indian economy FAQs

How does the Indian economy impact the Indian Rupee?

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.

What is the impact of Oil prices on the Rupee?

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.

How does inflation in India impact 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.

How does seasonal US Dollar demand from importers and banks impact 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

Tammy Da Costa, CFTe®

FXStreet

Tammy is an economist and market analyst with a deep passion for financial markets, particularly commodities and geopolitics.

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