Market Data 
- Indian Rupee (INR) trades on a stronger note on Wednesday.
- Lower oil prices and optimism about foreign fund inflows support the INR after facing the uncertainty surrounding Indian election.
- Traders will closely watch the Indian HSBC Services PMI and US ISM Services PMI for May, which are due on Wednesday.
Indian Rupee (INR) trims losses on Wednesday after facing some selling pressure in the previous session. On Tuesday, the uncertainty surrounding a majority win for the BJP-led government triggered a significant sell-off in Indian equities and the INR. Nevertheless, the decline in crude oil prices and optimism about foreign fund inflows due to India’s inclusion in the JPMorgan bond indices are likely to support the Indian Rupee.
Investors will keep an eye on the Indian HSBC Services PMI, which is expected to rise to 61.4 in May from 60.8 in April. On the US docket, the US ISM Services PMI will be published, along with the ADP Employment Change. In case of the stronger-than-expected reading, this might boost the US Dollar (USD) and create a tailwind for the USD/INR pair.
Daily Digest Market Movers: Indian Rupee remains firm amid the uncertainties
- The NSE Nifty 50 closed down nearly 6% at 21,884.5 points on Tuesday, its steepest fall since India’s first Covid lockdowns in March 2020. The S&P BSE Sensex also fell sharply, closing 5.7% lower at 72,079.05.
- The biggest fall for over four years for Indian stocks came after vote counting in India’s general election indicated Prime Minister Narendra Modi’s party might not be able to form a majority government, per BBC.
- Modi is set to negotiate with coalition partners in order to form a government. The BJP and its political allies, known as the National Democratic Alliance (NDA), have enough seats to form a majority government to rule for the next five years and return Modi to office for a third term, per the Guardian.
- “USD-INR to stabilize around current levels in the near term; strong service exports, index flows and FX reserves to support INR,” said Standard Chartered Economist and FX Analyst Jonathan Koh
- The US JOLTs Job Openings declined from 8.355 million to 8.059 million in April, below the market consensus of 8.34 million.
- The final reading US ISM Services PMI is estimated to improve to 50.5 in May from 49.4 in April.
Technical analysis: USD/INR climbs above the descending trend channel on the daily chart
The Indian Rupee trades firmer on the day. The USD/INR pair has broken above the descending trend channel that has been established since mid-April and crossed back above the key 100-day Exponential Moving Average (EMA) on the daily chart, turning the outlook to the upside. Additionally, the 14-day Relative Strength Index (RSI) stands in bullish territory at around 55.80, and it supports buyers for the time being.
A high of June 4 at 83.62 acts as an immediate resistance level for the pair. Any follow-through buying will see a rally to a high of April 17 at 83.72 en route to the 84.00 psychological level.
On the downside, the resistance-turned-support level of 83.40 will be the first downside target for USD/INR. The next contention level to watch is the 100-day EMA at 83.20. A breach of this level will see a drop to the 83.00 round mark, followed by a low of January 15 at 82.78.
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.
