USD/INR soars on US Dollar’s recovery, rallying Oil and FII outflows
- USD/INR surges over 0.6% at open due to a sharp recovery in US Dollar, rally in the Oil price, and FIIs selling equities.
- Middle East tensions have increased the safe-haven demand for the US Dollar.
- The Oil price soars over 7% as Israel strikes Iran.
The Indian Rupee (INR) tumbles at open to near 86.25 against the US Dollar (USD) on Friday. USD/INR surges as the US Dollar attracts substantial bids on Friday, tensions in the Middle East have increased its safe-haven demand. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is up 0.35% to near 98.20 from its three-year low of 97.60 posted on Thursday.
Earlier in the day, Israel struck a number of military and nuclear bases in the northeast of Iran’s capital, Tehran, in which the head of the Revolutionary Guard, Hossein Salami, was killed. Tel Aviv has confirmed that this is a unilateral military attack on Iran, aiming at “rolling back the Iranian threat to Israel’s very survival”, The Guardian reported. Meanwhile, Israel’s prime minister, Benjamin Netanyahu, has confirmed that their so-called “Operation Rising Lion” will continue for “many days”.
On the domestic front, the major trigger for the US Dollar will be the Federal Reserve’s (Fed) monetary policy announcement on Wednesday, in which the central bank is expected to leave interest rates steady in the current range of 4.25%-4.50%.
Investors will pay close attention to the Fed’s guidance on the monetary policy outlook for the remainder of the year. According to the CME FedWatch tool, the Fed is expected to start reducing interest rates from the September policy meeting.
On Thursday, US President Donald Trump reiterated criticism of the Fed’s stance to avoid any monetary policy adjustments at the current juncture after the release of the Producer Price Index (PPI) data for May, which showed that the producer inflation grew at a slower-than-projected pace. “Raise your rates. You don’t have to keep them up here. If it’s [inflation] going to go up, I’m okay with you raising--but it’s [inflation] down, and we’re going out to financing, and I may have to force something," Trump said at the White House, Reuters reported.
Daily digest market movers: Indian Rupee faces multiple headwinds
- A sharp upside move in the USD/INR pair at open on Friday is also driven by significant underperformance from the Indian Rupee due to multiple headwinds, including soft India’s Consumer Price Index (CPI) data for May, a stellar upside move in the Oil price, selling by Foreign Institutional Investors (FIIs) in the Indian equity market and dismal market sentiment amid tensions between Israel and Iran.
- The data showed on Thursday that year-on-year CPI rose by 2.82% on year, the lowest level seen in over six years. Economists expected the retail headline inflation to have grown by 3%, slower than 3.16% in April. This is the fourth straight month when the headline CPI has come in below the Reserve Bank of India’s (RBI) target of 3.7% for the current financial year, which it set last week after front-loading interest rate cuts.
- According to the CPI report, decelerating food inflation contributed significantly to cooling broader price pressures. The food inflation grew at a modest pace of 1%, the lowest level seen since October 2021.
- The scenario of cooling inflationary pressures would boost market expectations that the RBI will cut interest rates again this year. In last week’s policy meeting, RBI Governor Sanjay Malhotra changed the policy stance from “accommodative” to “neutral”, citing that there is little room for further monetary policy expansion.
- Meanwhile, surging Oil prices due to tensions in the Middle East region have weighed significantly on the Indian Rupee. Higher Oil prices bode poorly for the Indian currency, given that India is one of the world's largest oil importers.
- On the investment front, FIIs have withdrawn Indian equities in cash worth Rs. 3,548.87 crores till June 12 as profit booking kicks in after a strong recovery in Nifty50 since April. The outflow of foreign currency is an unfavorable scenario for the Indian Rupee.
Technical Analysis: USD/INR surges above 86.00
USD/INR recovers losses seen in the past few weeks and jumps above 86.00 during Asian trading hours on Friday. The pair bounces back sharply after discovering strong buying interest slightly below the 20-day Exponential Moving Average (EMA), which currently oscillates around 85.75.
The 14-day Relative Strength Index (RSI) jumps to near 56.00. A fresh bullish momentum would emerge if the RSI breaks above 60.00.
Looking down, the 20-day EMA is a key support level for the major. On the upside, the May 23 high of 86.44 will be a critical hurdle for the pair.
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.
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