USD/INR declines as outflow of foreign funds from Indian equity markets cools down

The Indian Rupee (INR) attracts significant bids against the US Dollar (USD) during India's afternoon session on Friday. The USD/INR pair corrects sharply to near 88.74, even as the US Dollar trades firmly, suggesting a decent strength in the Indian Rupee. The pair has slipped to near the lower border of its over two-week-long range of 88.75-89.10.

The Reserve Bank of India (RBI) had been lending support to the Indian Rupee against further depreciation against the US Dollar.

It seems that an improvement in the sentiment of overseas investors towards the Indian equity market has supported the Indian Rupee. In October 7-9, FIIs turned out to be net buyers, and bought Rs. 2,830.10 crores worth of shares. Though the buying amount is significantly lower than the scale of selling seen in the past few months, a shift in sentiment could be a major supporting factor for the Indian Rupee.

During the July-September period, Foreign Institutional Investors (FIIs) sold equity shares worth Rs. 1,29,870.96 crores in the Indian secondary market.

The overall trend in the Indian Rupee had remained weak since the United States raised tariffs on India to 50%. Washington raised import duties to penalize New Delhi for buying the oil from Russia. The US has been criticizing India for buying Russian oil, citing that funds mobilized from the Southeast Asian nation are supporting Moscow to continue the war in Ukraine.

A strong demand for the US Dollar from Indian importers to purchase oil and jewellery has been a major drag on the Indian Rupee. Another reason behind the persistent weakness in the Indian Rupee has been the consistent outflow of overseas funds from the Indian stock market.

Daily digest market movers: US Dollar gains despite Fed's dovish remarks

• The Indian Rupee has been holding ground near its all-time low against the US Dollar, even as the latter has stretched its rally. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near its over two-month high of around 99.50.
• The USD Index has been outperforming as its safe-haven demand has increased amid a deepening political crisis in France, following the sudden resignation by Prime Minister Sebastien Lecornu, and trimmed Bank of Japan (BoJ) hawkish bets since Sanae Takaichi was elected as the new Prime Minister of Japan.
• On the domestic front, the situation remains worrisome amid the ongoing US government shutdown as Republicans failed to persuade Democrats to support the short-term funding bill in the US Senate.
• Going forward, dovish commentaries from the Federal Reserve (Fed) on the monetary policy outlook could be a major drag on the US Dollar’s rally. On Thursday, New York Fed Bank President John Williams told The New York Times that more interest rate cuts are needed this year amid growing labor market risks.
• “Slowdown in monthly jobs growth, coupled with other signs that companies are more hesitant to hire, warrants attention, Williams said while arguing that it is appropriate to “bring interest rates back to a neutral setting”.
• Separately, San Francisco Federal Reserve Bank President Mary Daly also supported the need for more interest rate cuts, citing that the economy is “slowing a bit” and the labour market is “softening”.
• On the contrary, Fed Governor Michael Barr urged caution on further interest rate cuts, citing that inflationary pressures are unlikely to return to the central bank’s 2% target before the end of 2027.
• In Friday’s session, investors will focus on the preliminary Michigan Consumer Sentiment Index and Consumer Inflation Expectations data for October, which will be published at 14:00 GMT.

Technical Analysis: USD/INR corrects to near 20-day EMA

USD/INR breaches the two-week-long tight range between 88.76 and 89.11 on the downside. The pair is inching closer to returning to the 20-day Exponential Moving Average (EMA), which slopes higher around 88.70.

The 14-day Relative Strength Index (RSI) falls below 60.00, suggesting a strong bullish momentum has ended for now.

Looking down, the pair could extend its downside to near the September 23 low of 88.57.

On the upside, the pair could extend the rally towards the round figure of 90.00 if it breaks above the current all-time high of 89.12.