- The Indian Rupee loses traction to an all-time low in Tuesday’s early European session.
- A weak offshore Chinese Yuan, strong USD demand from importers, and higher crude oil prices weigh on the INR.
- The intervention by the RBI might help limit the local currency’s losses.
The Indian Rupee (INR) extends its downside to near a fresh record low on Tuesday. The strong US Dollar (USD) demand by corporates, likely related to month-end payments and weakness in the Chinese Yuan could drag the local currency lower. The slight uptick in crude oil prices contributes to the INR’s downside as India is the world’s third-largest oil consumer.
However, the routine intervention by the Reserve Bank of India (RBI) might help limit the INR’s losses. The RBI has been intervening aggressively to support the INR. The Indian central bank has ramped up its forward USD sales to limit the impact of spot market interventions on cash in the banking system and on foreign exchange reserves. The markets are likely to trade in a quiet session ahead of the holiday trading week.
Indian Rupee weakens amid global cues
- India’s benchmark indexes were closed higher on Monday. The Nifty 50 rose 0.7% to 23,753.45 points, while the BSE Sensex climbed 0.64% to 78,540.17, with both benchmarks snapping a five-session losing streak.
- “The Reserve Bank of India likely intervened in the currency market to prevent the exchange rate from depreciating further from the 85.12 levels. There were dollar sales from public sector banks, likely on behalf of the RBI,” a currency trader from a state-run bank said.
- The US New Home Sales climbed 5.9% to a seasonally adjusted annual rate of 664,000 in November, the Census Bureau reported on Monday. The sales pace for October was revised higher to a rate of 627,000 units from the previously reported 610,000 units.
- Durable Goods Orders in the US dropped by 1.1% in November to $285.1 billion, according to the US Census Bureau on Monday. This reading followed a 0.8% increase reported in October, missing the estimation of a 0.4% decline.
USD/INR’s positive picture prevails
The Indian Rupee edges lower on the day. However, the constructive view of the USD/INR pair remains in play, characterized by the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe.
The first upside barrier to watch is the ascending channel upper boundary at 85.25. Extended gains above this level could see a rally to 85.50, en route to the 86.00 psychological level.
On the downside, the 85.00-84.95 zone acts as a potential support area for USD/INR. The 14-day Relative Strength Index (RSI) is located above the midline near 68.95, suggesting that the support level is likely to hold rather than break. Else, a breach of the mentioned level could expose 84.21, the 100-day EMA.
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.
