Market Data 
- The Indian Rupee edges lower in Monday’s early European session.
- Persistent selling of domestic stocks from overseas weigh on the INR.
- Traders brace for the Chicago Fed National Activity Index for January, which is due later on Monday.
The Indian Rupee (INR) softens on Monday. The concern over Foreign Portfolio Investment (FPI) outflows, with foreign investors offloading over $11 billion in Indian stocks this year continues to weigh on the local currency.
Nonetheless, continued softness in the US Dollar (USD) might help offset these outflows, lifting the INR. Additionally, the likely intervention by the Reserve Bank of India (RBI) could prevent the Indian Rupee from significantly depreciating. Lower crude oil prices might support the INR as India is the world’s third-largest oil consumer.
Later on Monday, the Chicago Fed National Activity Index for January will be released. The attention will shift to the preliminary reading of US Gross Domestic Product (GDP) for the fourth quarter (Q4), which will be published on Thursday.
Indian Rupee loses traction amid foreign fund outflows
- India’s economic growth is estimated to recover in the third quarter of the current financial year 2024-25 (Q3FY25), with Gross Domestic Product (GDP) growth projected at 6.2%, up from 5.4% in Q2FY25, according to the Union Bank of India.
- The HSBC India Manufacturing Purchasing Managers Index (PMI) eased to 57.1 in February from 57.5 in January. The Indian Services PMI rose to 61.1 in February versus 56.5 prior.
- The Composite PMI improved to 60.6 in February from 57.7 in January.
- “Rapid restocking around the world continues to lift new export orders. A healthy acceleration in orders and output is keeping firms optimistic about the future. Input prices eased while output prices rose at a faster pace, leading to improved margins, especially for goods producers,” said Pranjul Bhandari, Chief India Economist at HSBC.
- The US S&P Global Composite PMI declined to 50.4 in February versus 52.7 prior.
- The US S&P Global Manufacturing PMI climbed from 51.2 in January to 51.6 in February, beating the estimation of 51.5. The Services PMI dropped from 52.9 in January to 49.7 in February, weaker than the 53.0 expected.
- The University of Michigan Consumer Sentiment Index fell to 64.7 in February, compared to the previous reading and the expectation of 67.8.
USD/INR maintains its constructive bias despite consolidation in the near term
The Indian Rupee trades on a weaker note on the day. The USD/INR pair maintains a positive view as the price holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. However, the 14-day Relative Strength Index (RSI) hovers around the midline near 50.0, suggesting that further consolidation or downside cannot be ruled out.
The first upside barrier for USD/INR is located at the 87.00 psychological level. Extended gains above the mentioned level could pave the way to an all-time high near 88.00, en route to 88.50.
On the other hand, a decisive break below the low of February 12 at 86.35 could see a drop to 86.14, the low of January 27. The additional downside target to watch is 85.65, the low of January 7.
RBI FAQs
The role of the Reserve Bank of India (RBI), in its own words, is “..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.
The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.
