- The Indian rupee gained momentum in early European trading on Monday.
- Inflows from MSCI's index rebalancing are expected to support INR, but portfolio outflows and a stronger US dollar may limit gains.
- The Chicago Fed National Activity Index and the Dallas Fed Manufacturing Business Index will be released later on Monday.
The Indian rupee (INR) extended its gains on Monday, supported by weaker greenbacks and expected inflows from changes in the MSCI index. However, continued overseas outflows, a resurgence in the US dollar (USD) and rising oil prices could create headwinds for the local currency, limiting its upside.
Traders are keeping an eye on Monday's release of the Chicago Fed's National Activity Index and the Dallas Fed's Manufacturing Conditions Index. Later this week, attention will be focused on the third quarter (Q3) US core personal consumption expenditures (PCE) price index and preliminary annualized gross domestic product (GDP) numbers.
MSCI rebalancing brings in billions of dollars, Indian rupee recovers
- The rebalancing of MSCI's stock index, which will take place after market close on Monday, is estimated to attract $2.5 billion of passive inflows into Indian equities, according to estimates by Nuvama Alternative and Quantitative Research. .
- The HSBC Flash India Composite Output Index stood at 59.5 in November, up from October's final reading of 59.1.
- The preliminary HSBC India Manufacturing Purchasing Managers' Index (PMI) for November was 57.3, down from the previous reading of 57.5. Services PMI for November was 59.2, an improvement from 58.5 in October.
- “Growth accelerated in the services sector, and the manufacturing sector managed to beat expectations despite slowing slightly from October's final PMI reading. Meanwhile, prices for raw materials used by manufacturers, foodstuffs, etc. “Pressure is mounting on “wage costs in the services sector,'' said Pranjul Bhandari, chief India economist at HSBC.
- The US S&P global composite PMI stood at 55.3 in November, up from 54.1 in October. On the other hand, the manufacturing PMI improved from 48.5 in October to 48.8 in November. Service PMI for November rose to 57.0 from 55.0 previously, exceeding expectations of 55.3.
USD/INR paints a positive picture in the long term
The Indian rupee traded higher on the day. However, USD/INR remains within the uptrend channel. Nevertheless, a constructive view prevails for the USD/INR pair as the price remains above the key 100-day exponential moving average (EMA) on the daily time frame, with the rally resuming rather than reversing. This suggests that it is likely. Additionally, the 14-day Relative Strength Index is above the midline near 59.50, indicating that further upside is expected.
The all-time high and trend channel upper limit of 84.52 serves as an immediate resistance level for USD/INR. If the bullish momentum above this level persists, it could rise to the psychological level of 85.00.
On the other hand, a break below the trend channel lower limit of 84.35 could initiate a decline to the next potential lower limit at the 84.00-83.90 area representing the round mark and 100-day EMA.
Frequently Asked Questions about Indian Rupees
The Indian Rupee (INR) is one of the most sensitive currencies 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.
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in the foreign exchange market to maintain exchange rates within a limited range. This is to ensure that Indian importers and exporters are not exposed to unnecessary currency risks during periods of currency fluctuations. The RBI buys and sells rupees at key levels in the spot market and uses derivatives to hedge its positions.
