Market Data 
- The Indian Rupee softens in Monday’s Asian session.
- A stronger USD and concerns over slowing domestic growth could drag the INR lower, but RBI intervention might cap its downside.
- The US November CPI inflation report will be released on Wednesday ahead of Indian CPI data.
The Indian Rupee (INR) weakens on Monday. The weakness in the Chinese Yuan, the renewed US Dollar (USD) demand from importers and local oil companies, and concerns over slowing domestic growth could weigh on the local currency in the near term. Despite this weakening, the expectations of increased government spending and foreign exchange intervention by the Reserve Bank of India (RBI) might help limit the INR’s losses.
Traders will monitor the US November Consumer Price Index (CPI) report on Wednesday, which is expected to rise to 2.7% YoY in November from 2.6% in October. This reading could be the last major obstacle to the Federal Reserve’s (Fed) third consecutive rate reduction. On the Indian docket, the CPI inflation data will be published on Thursday.
Indian Rupee edges lower amid firmer US Dollar and slowing India’s economic growth
- The RBI kept its benchmark repo rate unchanged at 6.50% during its October 2024 meeting.
- RBI Governor Das said, “The MPC believes that only with durable price stability can strong foundations be secured for high growth. The MPC remains committed to restoring the inflation growth balance in the overall interest of the economy.”
- The US Nonfarm Payrolls (NFP) increased by 227,000 in November, compared with an upwardly revised 36,000 in October, according to the US Bureau of Labor Statistics (BLS) on Friday. This figure came in better than the estimation of 200,000.
- The US Unemployment Rate ticked up to 4.2% in November from the previous reading of 4.1%, in line with the expectations of 4.2%.
- The annual wage inflation, as measured by the change in the Average Hourly Earnings, held steady at 4.0% YoY in November, coming in above the market forecast of 3.9%.
- According to the CME FedWatch tool, financial markets are now pricing in nearly 85.1% odds of a 25 basis points (bps) rate cut by the Fed on December 17-18.
USD/INR’s bullish outlook remains in play
The Indian Rupee trades on a weaker note on the day. The positive view of the USD/INR pair prevails as the price remains well above the key 100-day Exponential Moving Average (EMA) on the daily chart. The upward momentum is supported by the 14-day Relative Strength Index (RSI), which stands above the midline near 65.90, indicating further upside looks favorable.
The first upside barrier for USD/INR emerges at an all-time high of 84.77. Further north, the next hurdle is seen at the 85.00 psychological level, followed by 85.50.
On the flip side, a break below the resistance-turned-support of 84.60 could expose 84.22, the low of November 25. The additional downside filter to watch is the 84.05-84.00 region, representing the 100-day EMA and psychological mark.
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.
