USD/INR gains traction on foreign outflows
- Indian Rupee softens in Friday’s Asian session.
- Likely foreign outflows and a weaker US Dollar weigh on the INR.
- Traders brace for Fedspeak later on Friday.
The Indian Rupee (INR) trades in negative territory on Friday. Likely foreign outflows from domestic equities and higher crude oil prices undermine the Indian currency. Furthermore, consumer inflation in India fell more than expected to a near six-year low in April, strengthening bets that the Reserve Bank of India (RBI) is due to extend its rate-cutting cycle.
However, a broader weakness in the US Dollar and the progress of a multi-phase trade deal between the US and India could provide some support for the local currency in the near term. Traders will keep an eye on the speeches from the Federal Reserve (Fed) officials later on Friday, including Alberto Musalem, Jeff Schmid and Lisa Cook.
Indian Rupee drifts lower amid global cues
- The HSBC India Manufacturing Purchasing Managers Index (PMI) rose to 58.3 in May from the previous reading of 58.2. This figure came in stronger than the 58.0 expected.
- Indian Services PMI improved to 61.2 in April from 58.7 in March. Composite PMI rose to 61.2 in April versus 59.7 prior.
- “India’s flash PMI indicates another month of strong economic performance. Growth in production and new orders among manufacturing firms remains robust, despite a marginal cooling from the rates of increase observed in April," said Pranjul Bhandari, Chief India Economist at HSBC.
- India’s Commerce and Industry Minister Piyush Goyal stated that India and the US may finalise the first phase of the India-US trade deal before July.
- The US Global S&P Composite PMI rose to 52.1 in May's flash estimate from 50.6 in April. Meanwhile, the Manufacturing PMI improved to 52.3 in May from 50.2 in April, while the Services PMI rose to 52.3 from 50.8.
- The US Initial Jobless Claims for the week ending May 17 dropped to 227K, compared to the previous week of 229K, according to the US Department of Labor (DOL) on Thursday. This reading came in below the market consensus of 230K. Continuing Jobless Claims went up 36K to reach 1.903M for the week ending May 10.
USD/INR resumes its upside above the 100-day EMA
The Indian Rupee trades on a weaker note on the day. The USD/INR pair crosses above the key 100-day Exponential Moving Average (EMA) on the daily timeframe, indicating that the pair could resume its upside. The path of least resistance is to the upside as the 14-day Relative Strength Index (RSI) remains above the midline
On the bright side, the first upside barrier is seen at 86.10, the high of May 22. Any follow-through buying could see a rally to 86.61, the high of April 10.
The first downside target to watch for USD/INR is 85.35, the low of May 20. Failure to stay above the mentioned level might signal that bears are still in control and drag the price lower to 84.84, the low of May 12. A breach of this level could seem to drop to 84.15, the lower limit of the trend channel.
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.