- The Indian rupee traded in positive territory in early European trading on Tuesday.
- Weak domestic markets and persistent capital outflows are weighing on the Indian rupee, but central bank intervention could limit losses.
- Traders are awaiting the release of the US December ISM Services PMI later on Tuesday.
The Indian rupee (INR) rebounded on Tuesday after hitting an all-time low in the previous session. Reserve Bank of India (RBI) intervention could help limit further losses in the local currency. Meanwhile, the local currency remains vulnerable amid a wide range of US dollar (USD) bids. Moreover, the sharp decline in the domestic stock market and continued outflow of foreign capital may contribute to the downward trend in the INR.
Investors will be closely monitoring developments surrounding the incoming US administration based on President Donald Trump's tariff plans. Analysts say that if U.S. tariffs are significantly lower than Mr. Trump's campaign promise and target only key sectors, global growth prospects should improve and the U.S. dollar should weaken. There is.
The US ISM Services Purchasing Managers' Index (PMI) will be released later on Tuesday. Minutes from the Federal Reserve's December policy meeting will be released on Wednesday. All eyes will be on Friday's US Nonfarm Payroll (NFP) report.
Indian rupee gains ground despite domestic and global challenges
- The final HSBC India Services PMI for December was 59.3, down from the preliminary figure of 60.8. This measure was below the consensus of 60.5.
- “Forward-looking indicators such as new business and future activity suggest that the strong performance is likely to continue for the foreseeable future,” said Ines Lam, economist at HSBC.
- President Trump denied a Washington Post report that his aides were considering scaling back the tariff plan to apply only to certain critical imports.
- Federal Reserve President Lisa Cook said Monday that Fed policymakers may be more cautious about cutting rates further, citing the resilience of the labor market and the persistence of inflation.
- The US ISM services PMI is expected to improve to 53.0 in December from 52.1 in November.
Bullish bias prevails for USD/INR, upside may be limited by overbought RSI conditions
The Indian rupee appreciated on this day. The USD/INR pair has maintained its bullish trajectory over the past week as the price has broken out of the uptrend channel and is above the important 100-day exponential moving average (EMA) on the daily chart.
Nevertheless, the 14-day Relative Strength Index (RSI) is above the 70.00 mark, which warrants some caution for bulls. The overbought situation suggests that further consolidation cannot be ruled out.
An important upside wall appears at the all-time high of 85.84. If the pair continues to trade above this level, it could pave the way to the psychological mark of 86.00.
On the downside, the January 6 low of 85.60 serves as the first support level for USD/INR. Further south, the next contending level is at 85.00, followed by 84.45 (100-day EMA).
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 imported goods from abroad, making the rupee negative. At the same time, higher inflation usually leads to Reserve Bank of India (RBI) raising interest rates, which could be positive for the rupee as it increases demand from foreign investors. The opposite effect applies when inflation falls.
