USD/INR remains firm ahead of US CPI data
- Indian Rupee trades in negative territory in Tuesday’s early European session.
- Optimism from US-China trade talks underpins the US Dollar and drags the INR lower.
- Traders brace for the Indian and US CPI reports, due later on Tuesday.
The Indian Rupee (INR) softens on Tuesday, pressured by the firmer Greenback. Positive indications from the United States and China trade talks lift the US Dollar (USD) and weigh on the Indian currency. Additionally, an intensification of the India-Pakistan conflict might exert some selling pressure on the local currency.
Nonetheless, foreign portfolio investors (FPIs) have resumed buying of Indian equities, which might provide some support to the INR. According to analysts, any fresh developments on the geopolitical front are likely to have a significant impact on the rupee’s direction. Looking ahead, investors will keep an eye on the Indian Consumer Price Index (CPI) for April, which will be released later on Tuesday. On the US docket, the CPI inflation report is also due. The headline CPI is expected to show an increase of 2.4% YoY in April, while the core CPI is projected to show a rise of 2.8% YoY in the same report period.
Indian Rupee loses traction amid US-China trade deal progress
- India’s Prime Minister Narendra Modi on Monday stated that India will not tolerate any "nuclear blackmail.” Modi added that operations against Pakistan have only been paused, and the future will depend on their behavior.
- The ceasefire remained intact in Jammu and Kashmir and across border towns overnight, following PM Modi's stern message to terrorists and Pakistan.
- In FY25, The INR traded in the range of 83.10 and 87.6 against the Greenback, initially weakening after the US election results and depreciating by 2.4% over the year due to persistent FPI outflows and a strong Greenback.
- US President Donald Trump agreed to cut extra tariffs imposed on Chinese imports in April this year to 30% from 145%, and Chinese duties on US imports will be reduced to 10% from 125%. The fresh measures are effective for 90 days.
- Reuters reported on Tuesday that the US will cut "de minimis" tariffs on China shipments from 120% to 54%, with a minimum flat fee of $100 to remain.
- Swap markets have priced in the Fed’s first 25 basis points (bps) rate cut for the September meeting, and they expect two additional rate reductions towards the end of the year. Last week, they indicated three cuts this year, with a change likely as soon as July.
USD/INR keeps the bearish vibe below the key 100-day EMA
The Indian Rupee edges lower on the day. The bearish outlook of the USD/INR pair prevails as the price remains capped under the key 100-day Exponential Moving Average (EMA) on the daily chart. The downward momentum is supported by the 14-day Relative Strength Index (RSI), which stands below the midline near 44.15, suggesting that further downside looks favorable.
The first downside target for USD/INR emerges at 84.53, the low of May 8. Red candlesticks below this level could see a drop to 84.12, the low of May 5. The next contention level to watch is 83.76, the low of May 2.
On the other hand, the 85.00 psychological level acts as the immediate resistance level for the pair. Sustained trading above the mentioned level could see a rally to 85.60, the 100-day EMA, en route to 86.00, the upper boundary of the trend channel and round figure.
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.
