USD/INR drifts lower ahead of US PCE data

Indian Rupee edges higher amid the USD weakness.
Upbeat Indian growth prospects and substantial foreign investor equity inflows might cap the INR’s downside.
The release of the US Core Personal Consumption Expenditure Price Index (Core PCE) will be the highlight on Friday.

Lallalit Srijandorn FXStreet

Indian Rupee (INR) trades on the stronger note amid the US Dollar (USD) softness. The weaker-than-expected US GDP growth numbers exert some selling pressure on the Greenback and create a headwind for USD/INR. Furthermore, India's upbeat growth prospects and strong equity inflows from foreign investors might boost the INR in the near term.

According to the International Monetary Fund (IMF), India is estimated to contribute more than 16% of global growth due to economic reforms in key sectors such as infrastructure and digitalization, which have propelled India to be a "star performer" among countries. Additionally, the IMF stated in its annual Article IV consultation report released on Monday that the Indian economy is supported by prudent macroeconomic policies and is on course to become one of the world's major economies.

Market players will closely watch the US Core Personal Consumption Expenditure Price Index (Core PCE) for November. The Fed’s preferred inflation gauge is estimated to rise 0.2% MoM and 3.3% YoY. This figure could trigger volatility in the market ahead of the holiday season.

Daily Digest Market Movers: Indian Rupee is undermined by elevated inflation and global factors

The RBI monthly bulletin highlighted that if headline retail inflation is not brought down to the medium-term target of 4% and maintained there, it could underscore the potential impact on growth.
India’s foreign exchange reserves were $606.9 billion on December 8, 2023, the fourth largest among major foreign exchange reserve-holding countries, increased by $28.4 billion during 2023–24.
The RBI sold $310 million in the spot foreign currency market in October, according to the monthly Bulletin.
US Gross Domestic Product (GDP) for the third quarter grew 4.9%, weaker than the market expectation of 5.2% expansion.
The US Initial Jobless Claims rose 205,000 for the week ending December 16 from the previous week of 202K, below the consensus of 215,000.
The Philadelphia Fed Manufacturing Index came in at -10.5 in December versus -5.9 prior.
The Fed Funds futures are pricing in 82% odds of a rate cut at the March meeting, according to the CME FedWatch Tool.

Technical Analysis: Indian Rupee sticks to the longer-term range theme

Indian Rupee trades firmer on the day. The USD/INR pair has traded within the trading range of 82.80–83.40 since September. According to the daily chart, further upside in the shorter term looks favorable as the pair holds above the key 100-day Exponential Moving Average (EMA). Nonetheless, an attempt to break below the key EMA cannot be ruled out as the 14-day Relative Strength Index (RSI) remains below the 50.0 midpoint.

The first upside barrier of USD/INR will emerge at the upper boundary of the trading range at 83.40. A breakout above 83.40 will see a rally to the year-to-date (YTD) high of 83.47, followed by the 84.00 psychological mark. On the flip side, the critical support level is located at 83.00 round figure. The additional downside filter to watch is 82.80, portraying the confluence of the lower limit of the trading range and a low of September 12. Further south, the next contention level is seen near a low of August 11 at 82.60.

US Dollar price this week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Swiss Franc.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		-0.96%	-0.13%	-0.67%	-1.13%	0.04%	-1.08%	-1.60%
EUR	0.95%		0.82%	0.30%	-0.17%	0.99%	-0.12%	-0.62%
GBP	0.12%	-0.83%		-0.54%	-1.01%	0.16%	-0.96%	-1.47%
CAD	0.66%	-0.30%	0.53%		-0.47%	0.69%	-0.42%	-0.93%
AUD	1.11%	0.17%	0.98%	0.46%		1.14%	0.04%	-0.46%
JPY	-0.02%	-0.99%	-0.14%	-0.67%	-1.15%		-1.10%	-1.62%
NZD	1.07%	0.12%	0.95%	0.42%	-0.05%	1.06%		-0.51%
CHF	1.57%	0.63%	1.45%	0.92%	0.46%	1.56%	0.51%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

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

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.

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