- The Indian rupee loses momentum in early European trading on Tuesday.
- A pick-up in US dollar demand could weigh on the Indian rupee, but regular RBI interventions and lower oil prices could limit its downside.
- Investors will likely get more cues from President Trump's policy announcements this week.
The Indian rupee (INR) fell on Tuesday after hitting a one-week high in the previous session. The US dollar (USD) is likely to continue its upward trajectory due to demand from importers and a reversal in global capital flows to the US. Nevertheless, the Reserve Bank of India (RBI) may prevent a significant depreciation of the local currency through active intervention in the foreign exchange market. Moreover, lower crude oil prices are supporting the INR as India is the world's third largest oil consumer.
Investors are closely monitoring developments surrounding this week's policy announcements, which could provide new triggers for the pair. HSBC India's preliminary Purchasing Managers' Index (PMI) for January will be the focus of attention on Friday. In the US sources, preliminary S&P PMI data will be published.
Indian Rupee Remains Vulnerable Due to Multiple Global Impacts
- Four traders told Reuters that the central bank is expected to implement medium- to long-term dollar-to-rupee buy-sell swaps, driving futures premiums lower.
- Moody's on Monday revised down its forecast for India's economic growth rate for the fiscal year ending March 2025 to 7.0% from 8.2% in the previous fiscal year.
- State Bank of India (SBI) said on Monday that the Indian rupee is likely to rebound strongly once the euphoria over Donald Trump's inauguration as US president subsides.
- ING Bank said: “There is a risk of a dollar correction if we think President Trump ends up being more selective on tariffs, but that should probably happen at a later stage.”
- Foreign investors have sold a net total of about $6.5 billion in domestic stocks and bonds so far in January, the largest monthly outflow since October 2023.
- President Trump said Monday that he is considering imposing 25% tariffs on Canada and Mexico as early as early February, according to CNBC.
- President Trump said Monday he would immediately declare a national energy emergency and pledged to use his powers to reclaim strategic reserves and quickly approve new oil, gas and power projects that typically take years to get permits. .
USD/INR maintains bullish trend in the long term
The Indian rupee traded higher on the day. The USD/INR pair maintains a bullish tone on the daily time frame as the price continues to form highs and lows above the key 100-day exponential moving average (EMA). This upward momentum is supported by the 14-day Relative Strength Index (RSI), which is above the midline near 65.40, suggesting further upside looks favorable.
A key upside barrier for USD/INR appears at the all-time high of 86.69. If the move above this level continues, the psychological level could rise to 87.00.
On the downside, the January 20 low of 86.18 serves as the pair's first support level. Widening losses could expose the January 10 low of 85.85. Further south, the next contested level to watch is the January 7th low of 85.65.
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), will also be 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 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.
