USD/INR flattens as investors await India-US CPI data for July
- The Indian Rupee trades in a narrow range around 87.80 against the US Dollar as investors await the India-US inflation data for July.
- Economists expect inflation in India to have grown moderately, while the US CPI is expected to have risen at a faster pace.
- Both the US and China have agreed to extend the tariff truce for 90 days.
The Indian Rupee (INR) flattens around 87.80 against the US Dollar (USD) at open on Tuesday. The USD/INR pair trades sideways ahead of the release of the Consumer Price Index (CPI) data for July from both India and the United States (US), which will be published during the day.
Investors will closely monitor India’s retail inflation data to get cues about whether the Reserve Bank of India (RBI) will unwind monetary policy restrictiveness further. The RBI has cut its key Repo Rate by 100 basis points (bps) to 5.5% this year.
Economists expect the retail CPI to have grown at a moderate pace of 1.76% on year, compared to 2.1% in June. This would be the lowest figure seen in eight years. Signs of cooling price pressures would allow the RBI to ease the monetary policy further, which refreshed CPI projections for the current Financial Year (FY) to 3.1% in the policy announcement last week, down from 3.7% projected earlier.
Broadly, the outlook of the Indian Rupee remains uncertain amid trade tensions between India and the US. Delegates from both nations are scheduled to meet in New Delhi on August 25 for the sixth round of trade talks. Currently, trade relations between both economies are facing turbulence as US President Donald Trump has increased tariffs on imports from New Delhi to 50% for buying Oil from Russia.
Meanwhile, Foreign Institutional Investors (FIIs) resumed their selling spree and sold Rs. 1,202.65 crores worth of equity shares from Indian stock markets on Monday. FIIs' data on Friday showed an inflow of foreign funds of around Rs. 1,932.81 crores, while foreign portfolio investors remained sellers in all trading days of August.
Daily digest market movers: Indian Rupee trades sideways against US Dollar
- The Indian Rupee wobbles against the US Dollar while investors await the US CPI data for July. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto two-day gains around 98.50.
- Investors will closely monitor the CPI data as it will indicate whether the impact of tariff-driven inflation is one-time or persistent. June’s CPI report showed an increase in prices of products, which are largely imported into the US.
- Economists expect the headline and the core CPI – which excludes volatile food and energy prices – rose at a faster pace of 2.8% and 3.0% on year, respectively.
- Escalating inflationary pressures might force traders to reassess bets supporting interest rate cuts by the Federal Reserve (Fed) in the September meeting.
- According to the CME FedWatch tool, there is an 88% chance that the Fed will cut the Federal Funds Rate by 25 basis points (bps) to the range between 4.00% and 4.25%.
- On the global front, both the US and China have agreed to extend the tariff truce for 90 days. The Chinese Commerce Ministry stated earlier in the day that it is working towards reducing non-tariff barriers to American companies, and will suspend adding some US firms to its unreliable entity and export control lists for 90 days.
Technical Analysis: USD/INR stays above 20-day EMA
USD/INR trades in a tight range at open around 87.80 on Tuesday. The near-term trend of the pair is bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 87.24.
The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting a strong bullish momentum.
Looking down, the 20-day EMA will act as key support for the major. On the upside, the August 5 high around 88.25 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.