USD/INR gives back early gains as Fed's policy takes centre stage
- The Indian Rupee recovers early losses against the US Dollar, with the USD/INR falling to near 88.40.
- Rising oil prices due to heavy sanctions on Russia have weighed on the Indian Rupee.
- The Fed is almost certain to cut interest rates on Wednesday.
The Indian Rupee (INR) claws back its early losses against the US Dollar (USD) during late trading hours in India on Tuesday. The USD/INR pair flattens around 88.40 as the Indian Rupee bounces back.
Earlier in the day, the Indian currency faced selling pressure amid a recovery move in the oil price seen in the past week.
On the New York Mercantile Exchange (NYMEX), West Texas Intermediate (WTI) Crude Oil holds onto weekly gains around $61.50. The crude oil price has rallied lately as the European Union (EU) approved its 19th sanctions package against Russia, and the United States (US) imposed Ukraine-related sanctions on Russia’s two largest publicly traded oil firms, Reuters reported.
Currencies from economies, such as India, that rely heavily on imports of crude oil to address their energy needs, face significant pressure due to higher oil prices.
Meanwhile, subdued trading activity by overseas investors in the Indian stock market over the past few weeks remains a key concern for the Indian currency. The average amount of sales/purchases carried by Foreign Institutional Investors (FIIs) in Indian equity markets has been relatively lower than what has been seen in the past few months.
Going forward, the major trigger for the Indian Rupee will be developments in trade talks between the US and India. Over the weekend, a Bloomberg report showed that negotiators from both nations have agreed on almost all issues, and a deal could be announced soon. The Indian Rupee has been through a rough phase due to trade frictions between the US and China, which followed after Washington increased tariffs on imports from New Delhi to 50% for buying oil from Russia.
Daily digest market movers: Investors expect the Fed to cut interest rates on Wednesday
- The US Dollar revisits the weekly low due to firm expectations that the Federal Reserve (Fed) will cut interest rates in the monetary policy announcement on Wednesday.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.15% lower to near 98.60.
- Traders are increasingly confident that the Fed will cut interest rates by 25 basis points (bps) to 3.75%-4.00% on Wednesday due to labor market risks and moderate inflation growth. Lately, the majority of Federal Open Market Committee (FOMC) members, including Chairman Jerome Powell, have warned of deteriorating job conditions.
- Meanwhile, the US Consumer Price Index (CPI) report for September showed on Friday that monthly headline and core inflation rose at a moderate pace of 0.3% and 0.2%, respectively. So far, the impact of US tariffs has not appeared to be persistent on prices.
- In the policy meeting, investors will also focus on commentary about the further monetary policy outlook. According to the CME FedWatch tool, traders are confident that the Fed will also cut interest rates in the December policy meeting.
- On the global front, improving hopes of a trade deal between the US and China have boosted the demand for risk-sensitive assets. US President Donald Trump stated on Monday that both nations will reach a deal after his meeting with Chinese leader Xi Jinping later this week in South Korea.
- “I've got a lot of respect for President Xi and I think we're going to come away with a deal,” Trump said, and added, “I'll be going to China in the earlier part of next year,” Reuters reported.
Technical Analysis: USD/INR falls back to near 88.40
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The USD/INR pair jumps to near 88.60 on Tuesday. The pair strives to return above the 20-day Exponential Moving Average (EMA), which trades around 88.41.
The 14-day Relative Strength Index (RSI) recovers sharply from 40.00, suggesting buying interest at lower levels.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the all-time high of 89.12 will be a key barrier.
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
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
