Market Data 
- The Indian Rupee trades flat in Tuesday’s Asian session.
- The weakness in Asian peers, firmer USD, and foreign outflows could drag the INR lower.
- Investors brace for the US November CP inflation report, which is due on Wednesday.
The Indian Rupee (INR) holds steady on Tuesday after reaching an all-time low in the previous session. The local currency remains vulnerable due to a decline in its Asian peers, the outflow of foreign money, and persistent strength in the US Dollar (USD) from importers and foreign banks. However, the foreign exchange intervention by the Reserve Bank of India (RBI) might prevent the INR from further depreciation.
Looking ahead, the US Consumer Price Index (CPI) for November will be in the spotlight on Wednesday. This report could serve as the one remaining potential stumbling block to a third successive rate cut from the Federal Reserve (Fed). On the Indian docket, the CPI inflation data will be published on Thursday.
Indian Rupee remains vulnerable amid multiple headwinds
- “We expect INR to trade at current levels with a depreciating bias. The Reserve Bank of India’s recent measures to boost foreign inflows and a range-bound CAD (current account deficit) should lend support over the medium term,” noted economists at Bank of Baroda.
- India’s forex reserves rose by $1.51 billion to $658.09 billion for the week ended November 29, according to the RBI on Friday. For the previous week, the foreign exchange reserves were $656.58 billion.
- The Indian central bank revised its real Gross Domestic Product (GDP) growth forecast for the current fiscal year, lowering it from 7.2% to 6.6%, signaling a more cautious outlook for the Indian economy.
- San Francisco Fed President Mary Daly noted on Friday that the US jobs market still looked healthy after fresh employment data was released Friday. Daly further stated that the Fed is ready to raise rates if inflation breaks out again.
- Financial markets are now pricing in nearly an 85.8% possibility of a 25 basis points (bps) rate cut by the Fed on December 17-18, according to the CME FedWatch tool.
USD/INR paints a positive picture in the longer term
The Indian Rupee trades on a flat note on the day. The constructive outlook of the USD/INR pair remains in play, with the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Nonetheless, the 14-day Relative Strength Index (RSI) stands above the midline near 71.60, indicating the overbought RSI condition. This suggests that further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.
The all-time high of 84.86 acts as an immediate resistance level for USD/INR. Consistent trading above this level could pave the way to the 85.00 psychological level, en route to 85.50.
On the other hand, bearish candlesticks below the resistance-turned-support of 84.61 may draw in enough selling pressure to drag the pair to 84.22, the low of November 25. The next contention level to watch is 84.06, the 100-day EMA.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
