USD/INR loses traction ahead of US NFP data

Indian Rupee trades on a stronger note during Friday’s early European session.
Increased importers' USD demand undermines the INR, but RBI’s intervention and rising Fed rate cut bets might cap its downside.
The US August employment report will be in the spotlight later on Friday.

The Indian Rupee (INR) recovers some lost ground on Friday after retreating to its record closing low in the previous session. Traders remain vigilant for possible interventions from the Reserve Bank of India (RBI) through USD sales, which prevented the INR from depreciating past the crucial 84 level. However, the US Dollar (USD) demand from oil importers and foreign portfolios might weigh on the local currency.

Investors will closely monitor the US August employment data on Friday, including Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings. Any sign of further weakening in the labor market could prompt the expectation of a deeper rate cut by the Federal Reserve (Fed). This, in turn, could exert some selling pressure on the Greenback, making other currencies like Indian Rupee more attractive.

Daily Digest Market Movers: Indian Rupee drifts higher ahead of US employment data

“Rupee makes a new all-time low of Rs 83.99 per dollar as importers, FPIs and oil companies continue buying while RBI ensures that it does not cross Rs 84.00 per dollar, a psychological level,” said Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors LLP.
Private sector employment increased by 99,000 in August and annual pay was up 4.8% year-over-year, Automatic Data Processing (ADP) reported on Thursday. This figure followed the 111,000 (revised from 122,000) increase seen in July and below the estimation of 145,000 by a wide margin.
The weekly US Initial Jobless Claims rose to 227,000, compared to the previous reading of 232,000 (revised from 231,000) and below the initial consensus of 230,000.
US ISM Services PMI increased to 51.5 in August from 51.4 in July, beating the estimation of 51.1.
Chicago Fed President Austan Goolsbee said on Friday that the longer-run trend of labor market and inflation data justify the Fed easing interest-rate policy soon, and then steadily over the next year.

Technical Analysis: USD/INR’s broader trend remains constructive

The Indian Rupee traders firmer on the day. The USD/INR pair remains confined within an ascending triangle on the daily chart. However, in the long term, the pair maintains the bullish vibe unchanged as the price holds above the key 100-day Exponential Moving Average (EMA). The upward momentum is reinforced by the 14-day Relative Strength Index (RSI) which stands in bullish territory near 59.55, supporting the buyers in the near term.

Sustained trading close above the 84.00-84.05 zone, the confluence of the psychological figure, the upper boundary of the triangle and the high of September 4, could see an upside breakout that may take USD/INR up to 84.50.

Any follow-through selling could drag the pair down to the ascending triangle support near 83.90. A breach below this level could revisit the 100-day EMA at 83.64.

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.

How do the decisions of the Reserve Bank of India impact the Indian Rupee?

The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.

What macroeconomic factors influence the value of the Indian Rupee?

Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.

How does inflation impact the Indian Rupee?

Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.

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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