- The Indian rupee faced challenges due to foreign exchange outflows due to increased risk aversion.
- India's annual inflation rate rose to a nine-month high of 5.49% in September, reducing the possibility of a Reserve Bank of India (RBI) rate cut.
- As India is the world's third-largest oil importer, the fall in crude oil prices may limit the downside of the INR.
As the Indian rupee (INR) faces challenges due to foreign currency outflows, the USD/INR pair is hovering around an all-time high of 84.14. The situation comes as traders assess the Reserve Bank of India's (RBI) policy outlook in light of India's recent inflation data.
India's Consumer Price Index (CPI) in September rose to 5.49% compared to the same month last year, the highest level in nine months, up from 3.65% in the previous month and well above market expectations of 5.0%. This rate of increase marks the highest inflation rate recorded this year and is higher than the Reserve Bank of India's (RBI) target of 4%. As a result, expectations for an early interest rate cut by the RBI have waned.
Given that India is the world's third-largest oil importer, the Indian rupee could be supported by lower oil prices. Oil prices are under downward pressure due to global demand concerns, outweighing the impact of supply concerns related to continued uncertainty in the Middle East conflict.
West Texas Intermediate (WTI) crude oil prices have continued to decline for the fourth consecutive session and are trading around $70.30 per barrel at the time of writing.
Daily Digest Market Movers: Indian rupee struggles due to foreign currency outflow
- The US dollar index (DXY), which measures the value of the US dollar (USD) against six other major currencies, remains near the two-month high of 103.35 hit on Monday. Expectations that the Federal Reserve will ease aggressively in 2024 have faded after strong employment and inflation data released last week.
- According to the CME FedWatch tool, there is currently a 94.1% chance of a 25 basis point rate cut in November, with no expectations for a larger 50 basis point rate cut.
- On Tuesday, Atlanta Fed President Rafael Bostic said he expected only one more 25 basis point rate cut this year, as reflected in the outlook at last month's U.S. central bank meeting. . The median forecast was 50 basis points, higher than the 50 basis points already in place in September, according to Reuters.
- On Monday, foreign institutional investors were net sellers of stocks totaling 37.32 billion rupees ($444 million), the 11th consecutive session of net selling. In contrast, domestic investors made net purchases of shares worth Rs 22.78 billion, according to Reuters.
- The Washington Post reported on Monday that Israeli Prime Minister Benjamin Netanyahu told the United States that Israel plans to focus on Iran's military targets rather than its nuclear and oil infrastructure.
- Minneapolis Federal Reserve President Neel Kashkari reassured markets late Monday by reaffirming the Fed's data-dependent approach. According to Reuters, Kashkari cited the continued easing of inflationary pressures and a robust labor market, despite recent increases in overall unemployment, and cited the Fed's well-publicized concerns about the strength of the U.S. economy. He reiterated the views of policymakers.
Technical analysis: USD/INR maintains position above 84.00, near all-time high
The USD/INR pair is hovering around 84.00 on Wednesday. Analyzing the daily chart, we can see that this pair is testing the lower bound of an ascending channel pattern. A break below this channel could signal a potential change from the current bullish sentiment. However, the 14-day Relative Strength Index (RSI) remains above the 50 level, suggesting that bullish momentum is still intact.
In terms of resistance, the USD/INR pair may encounter a barrier at the all-time high of 84.14 recorded on August 5th. A breakout of this level could push the USD/INR pair towards the upper end of the ascending channel (estimated around 84.35). .
On the downside, a break below the immediate psychological level support at 84.00 could target the 9-day exponential moving average (EMA) around 83.97.
USD/INR: Daily chart
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.
