USD/INR posts modest gains on US-China trade truce
- Indian Rupee trades in negative territory in Tuesday’s Asian session.
- Optimism from US-China trade talks underpins the US Dollar and drags the INR lower.
- Traders brace for the Indian and US CPI reports, due later on Tuesday.
The Indian Rupee (INR) softens on Tuesday, pressured by the firmer Greenback. Positive indications from the United States and China trade talks lift the US Dollar (USD) and weigh on the Indian currency. Additionally, an intensification of the India-Pakistan conflict might exert some selling pressure on the local currency.
Nonetheless, foreign portfolio investors (FPIs) have resumed buying of Indian equities, which might provide some support to the INR. Looking ahead, investors will keep an eye on the Indian Consumer Price Index (CPI) for April, which will be released later on Tuesday. On the US docket, the CPI inflation report is also due. The headline CPI is expected to show an increase of 2.4% YoY in April, while the core CPI is projected to show a rise of 2.8% YoY in the same report period.
Indian Rupee loses ground amid US-China trade deal progress
- India’s Prime Minister Narendra Modi on Monday stated that India will not tolerate any "nuclear blackmail.” Modi added that operations against Pakistan have only been paused, and the future will depend on their behavior.
- The ceasefire remained intact in Jammu and Kashmir and across border towns overnight, following PM Modi's stern message to terrorists and Pakistan.
- US President Donald Trump agreed to cut extra tariffs imposed on Chinese imports in April this year to 30% from 145%, and Chinese duties on US imports will be reduced to 10% from 125%. The fresh measures are effective for 90 days.
- Swap markets have priced in the Fed’s first 25 basis points (bps) rate cut for the September meeting, and they expect two additional rate reductions towards the end of the year. Last week, they indicated three cuts this year, with a change likely as soon as July.
USD/INR keeps the bearish vibe below the key 100-day EMA
The Indian Rupee edges lower on the day. The bearish outlook of the USD/INR pair prevails as the price remains capped under the key 100-day Exponential Moving Average (EMA) on the daily chart. The downward momentum is supported by the 14-day Relative Strength Index (RSI), which stands below the midline near 44.15, suggesting that further downside looks favorable.
The first downside target for USD/INR emerges at 84.53, the low of May 8. Red candlesticks below this level could see a drop to 84.12, the low of May 5. The next contention level to watch is 83.76, the low of May 2.
On the other hand, the 85.00 psychological level acts as the immediate resistance level for the pair. Sustained trading above the mentioned level could see a rally to 85.60, the 100-day EMA, en route to 86.00, the upper boundary of the trend channel and round figure.
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.