- The Indian Rupee loses ground in Friday’s early European session.
- Escalating geopolitical tensions after the Kashmir attack might undermine the INR.
- Positive developments in the trade talks and continued foreign inflows might cap the pair’s downside.
The Indian Rupee (INR) weakens on Friday, pressured by renewed US Dollar (USD) demand. Heightened geopolitical tensions following a terror attack in Pahalgam, Jammu, and Kashmir also drag the Indian currency lower.
Nonetheless, the optimism surrounding US-India trade talks could provide some support to the Indian currency. Currently, the 26% reciprocal tariff on India that the US imposed is on a 90-day pause. The suspension will expire on July 8. India does face a 10% tariff as other nations per the US trade policy. Furthermore, rising Foreign Institutional Investor (FII) inflows might contribute to the INR’s upside. Investors will keep an eye on the final reading of the US Michigan Consumer Sentiment later on Friday.
Indian Rupee trades softer amid escalating tensions between India and Pakistan
- According to the Reuters poll, the Reserve Bank of India is expected to cut the Repo Rate to 5.50% by end-Q3 (vs. 5.75% in March poll).
- India’s economy is to grow 6.3% in 2025-26 and 6.5% in 2026-27 (vs 6.5% and 6.5% in March poll), Reuters poll.
- Asked how US tariffs have affected business sentiment in India, 60% of economists, 21 of 35, said the impact was negative or very negative. Meanwhile, 14 economists said it was neutral.
- Pakistan has announced a series of retaliatory diplomatic moves against India and demanded evidence to back up the Indian government’s claims that Islamabad was involved in the Kashmir attack.
- US Treasury Secretary Scott Bessent has suggested that India is likely to become the first country to finalise a bilateral trade agreement with the US to avoid Trump’s reciprocal tariffs on Indian exports.
- Minneapolis Fed President Neel Kashkari said late Thursday that he is worried that with the uncertainty, businesses will do layoffs.
USD/INR’s bearish outlook remains in place
The Indian Rupee trades softer on the day. However, the bearish tone of the USD/INR pair prevails as the pair is below the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The 14-day Relative Strength Index (RSI) stands below the midline near 38.35, suggesting that further downside looks favorable.
The first downside target to watch is 84.85, the lower limit of the descending trend channel. Sustained trading below this level could open the door for a move towards 84.22, the low of November 25, 2024. The next contention level is seen at 84.08, the low of November 6, 2024.
On the bright side, the 100-day EMA at 85.82 acts as an immediate resistance level for USD/INR. A decisive break above the mentioned level could see a rise to 86.45, the upper boundary of the trend channel.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
