- The Indian rupee traded in negative territory early in Europe on Tuesday.
- The INR has fallen due to a weaker Chinese yuan, higher dollar bids and a slower pace of Fed rate cuts.
- India's November federal budget deficit and third-quarter trade deficit will be the highlights on Tuesday ahead of the New Year holidays.
The Indian rupee (INR) widened its decline on Tuesday after falling to its lowest closing level in the previous session. The local currency remains under selling pressure due to the offshore Chinese yuan and broader decline in US dollar demand. Additionally, rising expectations that the US Federal Reserve's policy interest rate will rise for an extended period of time, sluggish capital inflows, and the threat of tariffs under President-elect Donald Trump contributed to the INR decline. I am doing it.
However, the Reserve Bank of India's (RBI) intervention in the NDF (non-deliverable forward) market may prevent a sharp fall in the INR. It's likely to be a quiet trading week with a shortened holiday and low trading volume. Traders are bracing for India's federal budget deficit for November and India's trade deficit for the third quarter to be announced later on Tuesday.
Indian Rupee Remains Vulnerable Amid Multiple Challenges
- Analysts believe that the Reserve Bank of India is unlikely to change its strategy of entering the foreign exchange market to ensure stability of the Indian rupee.
- “We believe that central bank actions will be situational and may intervene to curb volatility. Since the last two years, the rupee has stabilized due to its intervention strategy.” said Dilip Parmar, Forex Research Analyst, HDFC Securities.
- India's current account deficit (CAD) is expected to remain at 1.1 per cent of gross domestic product (GDP) in financial year 2024-25 (FY25), according to a report by ICICI Bank.
- “We expect the dollar-rupee to remain in the range of $85.30-$85.60, which will lead to some bullish buying,” said Anil Bhansali, head of finance at Finrex Treasury Advisors.
- Foreign portfolio investors sold more than $10 billion of domestic stocks and bonds on a net basis this quarter, according to stock custodian data.
- U.S. pending home sales rose 1.8% month-over-month (revised from 2.0%) in November compared to 2.2% month-over-month in November, according to the National Association of Realtors (NAR) on Monday. % increase. This measurement was better than the estimated value of 0.7%.
- The Chicago Purchasing Managers' Business Index for December was 36.9, down from 40.2 last time and below expectations of 42.5.
USD/INR maintains bullish bias in the long run
The Indian rupee depreciated on this day. Technically, the strong uptrend in the USD/INR pair remains in play as the pair is well supported above the important 100-day Exponential Moving Average (EMA) on the daily time frame. Masu.
However, the 14-day Relative Strength Index (RSI) is sitting around 76.10, indicating overbought conditions. This suggests that we cannot rule out further consolidation before bracing for a near-term USD/INR appreciation.
The pair's first upside barrier appears at its all-time high of 85.81. If the bulls can sustain a decisive break above the above levels, it could attract potential buyers to the psychological level of 86.00.
On the bearish side, the resistance-turned-support 85.45 level serves as the first downside objective for USD/INR. If the pair continues to trade below this level, the round mark of 85.00 could be exposed. The main contending level appears to be at the 100-day EMA at 84.32.
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 the cost of exports and more rupees are sold to buy imported goods from abroad, 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.
