USD/INR trades flat at open as India’s inflation cools
- The Indian Rupee consolidates at open against the US Dollar around 87.75, while inflation in India has cooled significantly.
- The US core inflation grew at a faster pace of 3.1% in July.
- Traders raised Fed dovish bets after the inflation data.
The Indian Rupee (INR) opens on a flat note against the US Dollar (USD) at around 87.75 on Wednesday. The USD/INR pair consolidates as the downside move in the US Dollar due to firm Federal Reserve’s (Fed) interest rate cut expectations for the September meeting have offset the impact of weakness in the Indian Rupee.
The Indian currency has come under pressure as growing risks of India’s retail inflation undershooting the Reserve Bank of India’s (RBI) already-lowered inflation forecast have paved the way for more interest rate cuts.
On Tuesday, India’s retail Consumer Price Index (CPI) came in at 1.55% on year, the lowest level seen since June 2017. Economists expected price pressures to have grown at a moderate pace of 1.76% against the prior reading of 2.1%. In the monetary policy announcement earlier this month, the RBI revised inflation projections for the current financial year to 3.1% from 3.7% anticipated earlier.
Cooling inflationary pressures in India, which demonstrate muted consumer demand, have come at a time when the economy is anticipating tariffs imposed by the United States (US) to shave off 30-40 basis points (bps) Gross Domestic Product (GDP) growth.
According to a written response from Union Minister of State for Finance Pankaj Chaudhary to Lok Sabha MP Abhishek Banerjee, “It is estimated that around 55% of the total value of India’s merchandise exports to the US is subject to this reciprocal tariff,” Hindustan Times (HT) reported.
Last week, US President Donald Trump raised tariffs on imports from New Delhi to 50% for purchasing Oil from Russia. On the trade deal outlook with India, US Treasury Secretary Scott Bessent said in an interview with Fox Business on Tuesday that New Delhi had been “a bit recalcitrant” in trade talks with the US.
Daily digest market movers: Escalating Fed dovish bets weigh on the US Dollar
- The USD/INR pair trades flat, while the US Dollar faces selling pressure as traders have raised bets supporting interest rate cuts by the Federal Reserve (Fed) after the release of 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, trades cautiously near its two-week low around 98.00.
- According to the CME FedWatch tool, the probability of the Fed to cut interest rates in the September meeting has increased to 94% from almost 86% recorded on Monday.
- The US CPI report showed that the headline inflation grew at a steady pace of 2.7% on year, slower than expectations of 2.8%. The core CPI – which excludes volatile food and energy items – rose at a faster pace of 3.1%, compared to expectations of 3% and the prior reading of 2.9%.
- Contrary to market expectations, analysts at Scotiabank have stated that a “closer look at the July CPI data shows inflation’s pulse accelerated to its highest pace since January, with core consumer prices up 0.3% on the month. While further inflation is due before the September meeting, nothing in here says cut.”
Technical Analysis: USD/INR stays above 20-day EMA
USD/INR flattens around 87.75 on Wednesday. The near-term trend of the pair is bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 87.26.
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.