Market Data 
- Indian Rupee (INR) loses ground on Wednesday despite the weaker US Dollar.
- The ongoing India inflows might support the INR, while higher crude oil prices could limit its gains.
- The Indian HSBC PMI and US S&P Global PMI reports will be the highlights on Friday.
The Indian Rupee (INR) edges lower on Wednesday despite the softer Greenback. The local currency strengthened on Tuesday, supported by US Dollar (USD) sales by state-run banks and likely foreign inflows in Indian bonds and equities. Analysts expect India’s upcoming inclusion in the JPMorgan emerging market debt index could boost the Indian Rupee in the near term.
Additionally, the weaker-than-expected US Retail Sales report spurred the likelihood that the Federal Reserve (Fed) will start to cut interest rates in a few months, which might weigh on the Greenback. However, the rise of crude oil prices to two-month highs might also cap the upside of the INR as India is the third largest consumer of Oil behind the US and China.
The Indian and US economic docket will be empty on Wednesday. Investors await the Indian HSBC Manufacturing and Services PMI on Friday for fresh impetus, along with the Reserve Bank of India (RBI) Meeting Minutes. On the US front, the S&P Global PMI reports will be released at the end of the week.
Daily Digest Market Movers: Indian Rupee weakens despite the country’s positive economic outlook
- Indian Equity indices touched record highs on Tuesday, with the benchmark BSE Sensex ending at 77,301, up 308 points or 0.4%, while the Nifty50 closed at 23,558, up 92 points or 0.39%.
- The Indian Rupee may strengthen beyond 83.20 once inflows from India’s inclusion in the JPMorgan emerging market debt index start later this month, said Sajal Gupta, head of forex and commodities at Nuvama Wealth Management’s institutional desk.
- The US Retail Sales rose 0.1% MoM in May from a 0.2% decline in April, below the market expectation for an increase of 0.2%, the Commerce Department reported Tuesday.
- New York Fed President John Williams said on Tuesday that he expected interest rates to come down gradually as inflation eases.
- Boston Fed President Susan Collins stated that despite progress on inflation, price growth remained persistently over the Fed’s 2% inflation objective, adding that it is still too early to say whether or not inflation is on course toward the target.
- Richmond Fed President Thomas Barkin said the recent data showed consumer prices did not rise at all from April to May, but the choppiness in data since last year means the policy path ahead is not clear.
Technical analysis: USD/INR remains constructive in the longer term
The Indian Rupee trades on a softer note on the day. According to the daily timeframe, the positive outlook of the USD/INR pair remains unchanged as the pair holds above the key 100-day Exponential Moving Average (EMA). However, the 14-day Relative Strength Index (RSI) returns bearish territory around 48.0, indicating that consolidation or further downside cannot be ruled out.
Extended losses below the 100-day EMA at 83.25 will see a drop to the 83.00 psychological level, followed by 82.78 (low of January 15).
On the upside, the first upside barrier for the pair is seen at 83.55 (high of June 18). Further north, the next hurdle will emerge at 83.72 (high of April 17) en route to 84.00 (round 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.
