- The Indian rupee lost momentum to an all-time low in early European markets on Tuesday.
- A weakening offshore Chinese yuan, strong demand for US dollar from importers and rising oil prices are weighing on the Indian rupee.
- Intervention by RBI may help limit local currency losses.
The Indian rupee (INR) extended its decline to near new all-time lows on Tuesday. Strong demand for the US dollar (USD) by businesses, likely related to end-of-month payments and a depreciation of the Chinese yuan, could depreciate the local currency. As India is the third largest oil consumer in the world, a slight increase in crude oil prices has contributed to the decline in INR.
However, regular interventions by the Reserve Bank of India (RBI) could help limit INR losses. RBI is actively intervening to support INR. India's central bank has increased its forward selling of US dollars to limit the impact of spot market interventions on cash and foreign exchange reserves in the banking system. The market is likely to see quiet trading ahead of the holiday trading week.
Indian rupee weakens due to global influences
- India's benchmark index closed higher on Monday. The Nifty 50 rose 0.7% to 23,753.45 points and the BSE Sensex rose 0.64% to 78,540.17 points, ending the losing streak for both indexes at five points.
- “The Reserve Bank of India likely intervened in the exchange market to prevent the exchange rate from depreciating further from the 85.12 level. That's probably the case,'' said a currency trader at the state-run central bank. said the bank.
- U.S. new home sales rose a seasonally adjusted annual rate of 5.9% to 664,000 units in November, the Census Bureau said Monday. The sales pace for October has been revised upward from the previously announced 610,000 units to 627,000 units.
- U.S. durable goods orders fell 1.1% to $285.1 billion in November, the U.S. Census Bureau said Monday. This figure follows a 0.8% increase reported in October and missed forecasts for a 0.4% decline.
A positive image of USD/INR spreads
The Indian rupee depreciated on the day. However, the constructive view on the USD/INR pair is still in play, with the price trading above the important 100-day exponential moving average (EMA) on the daily time frame.
The first upside barrier to note is the top of the ascending channel at 85.25. If the rally continues above this level, it could rise to 85.50 on its way to the psychological level of 86.00.
On the downside, the 85.00-84.95 zone serves as a potential support area for USD/INR. The 14-day Relative Strength Index (RSI) sits above the midline near 68.95, suggesting that the support level is likely to hold rather than break. If not, a breach of the aforementioned levels could expose us to the 100-day EMA, 84.21.
Frequently Asked Questions about Indian Rupees
The Indian Rupee (INR) is one of the currencies that is most sensitive to external factors. The price of oil (the country is heavily dependent on oil imports), the value of the US dollar (most trade is done in US dollars), and the level of foreign investment all play a role. Direct intervention by the Reserve Bank of India (RBI) in the foreign exchange market to maintain exchange rate stability and the level of interest rates set by the RBI are factors that have an even greater impact on the rupee.
The Reserve Bank of India (RBI) actively intervenes in the foreign exchange market to maintain stable exchange rates and facilitate trade. Additionally, the RBI seeks to maintain inflation at its target of 4% by adjusting interest rates. Typically, when interest rates rise, the rupee appreciates. This is due to the role of the “carry trade,'' in which investors borrow in a country with low interest rates, place their funds in a country with relatively high interest rates, and profit from the difference.
Macroeconomic factors that influence the value of the rupee include inflation, interest rates, economic growth rate (GDP), trade balance, and inflows from foreign investments. Higher growth rates could lead to more foreign investment and higher demand for the rupee. A reduction in the negative trade balance will ultimately lead to a stronger rupee. Rising interest rates, especially real interest rates (interest rates minus inflation), are also positive for the rupee. The risk-on environment is likely to lead to higher foreign direct and indirect investment (FDI and FII) inflows, which will also benefit the rupee.
A rise in inflation, especially when it is relatively high compared to India's peers, is generally negative for a currency as it reflects a fall in the value of the currency due to oversupply. Inflation also increases export costs and more rupees are sold to buy foreign imports, making the rupee negative. At the same time, higher inflation usually leads to a hike in Reserve Bank of India (RBI) interest rates, which could be positive for the rupee as it increases demand from foreign investors. The opposite effect applies when inflation falls.
