USD/INR rises ahead of India’s Q2 GDP, US PCE inflation data
- The Indian Rupee declines to near 87.90 against the US Dollar due to multiple headwinds.
- US tariffs and FIIs' outflow continue to weigh on the Indian Rupee.
- Investors await India’s Q2 GDP and the US PCE inflation data for July.
The Indian Rupee (INR) opens on a weak note against the US Dollar (USD) on Friday. The USD/INR jumps to near 87.90 as higher tariffs imposed by the United States (US) on imports from India, and the consistent outflow of foreign funds from Indian stock markets have remained major drags on the Indian Rupee.
Earlier this week, Washington confirmed additional 25% tariffs on India for buying Russian Oil, which took the overall import duty to 50%, a move that has weakened the competitiveness of Indian products in the global market.
The monthly bulletin released by the Reserve Bank of India (RBI) on Thursday also showed that US tariffs pose downside economic risks in the near term. However, the domestic consumption remained resilient, and a strong demand is coming from rural areas.
Meanwhile, Foreign Institutional Investors (FIIs) extended selling in Indian equity markets for the fourth trading day on Thursday, and pared stake worth Rs. 3,856.51 crores. So far in August, FIIs have timed stake by Rs. 38,590.26 crores.
In Friday’s session, investors will focus on the Q2Gross Domestic Product (GDP) data, which will be published at 10:30 GMT. The Indian economy is expected to have risen at a moderate pace of 6.6% on an annualized basis, compared to a 7.4% growth
Daily digest market movers: Indian Rupee weakens against US Dollar
- A marginal upside move in the US Dollar ahead of the US Personal Consumption Expenditure Price Index (PCE) data for July, which will be published at 12:30 GMT, has also strengthened the USD/INR pair.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% higher to near 98.00.
- Investors will pay close attention to the US PCE inflation data as it will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook. Economists expect the US core PCE inflation, which is the Fed’s preferred inflation gauge, to have risen at a faster pace of 2.9% on year against 2.8% in June, with the monthly figure rising steadily by 0.3%.
- Signs of price pressures cooling would allow traders to raise bets supporting interest rate cuts by the Federal Reserve (Fed) for the September policy meeting. On the contrary, inflation rising faster than projected would weaken the same.
- According to the CME FedWatch tool, there is an 85% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.00%-4.25% in the policy meeting in September.
- On Thursday, Fed Governor Christopher Waller explicitly announced that he would support a 25-bps interest rate cut in the policy meeting next month, and added that there will be more cuts in the next three to six months. “The time has come to move policy to a more neutral stance,” Waller said. The reasoning behind Waller’s dovish remarks is weakening labor market conditions, which he warned that it could deteriorate further and quickly.
- Meanwhile, the safe-haven appeal of the US Dollar is under threat as Fed Governor Lisa Cook filed a lawsuit on Thursday for her termination by US President Donald Trump over mortgage allegations. According to a report from Reuters, a hearing on the motion is set for 14:00 GMT on Friday. The verdict by the court against Trump could dampen the credibility of the White House. Market experts have already seen the event as Trump’s attempt to politicize the Fed.
Technical Analysis: USD/INR rises to near 87.90
The USD/INR pair jumps to near 87.90 on Friday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 87.50.
The 14-day Relative Strength Index (RSI) rises above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.
Looking down, the July 28 low around 86.55 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.