USD/INR declines on possible RBI’s intervention into local spot market
- The Indian Rupee gains sharply against the US Dollar as the RBI seems to have intervened.
- FIIs start the November series by paring stake in the Indian stock market.
- Fed members express that the December policy is widely open.
The Indian Rupee (INR) jumps to near 88.50 in the opening session against the US Dollar (USD) on Tuesday. The USD/INR pair faces a sharp selling pressure as the Indian Rupee strengthens on hopes that the Reserve Bank of India (RBI) has intervened in the currency market to support the Indian Rupee.
The RBI likely intervened to shore up the rupee before the local spot market opened on Tuesday, Reuters reported.
A stealth intervention by the RBI in the local spot market has come amid fears that the USD/INR pair could pass its recent all-time high around 89.10, a scenario that could build pressure on importers.
The Indian Rupee has been underperforming due to the continuous outflow of foreign funds from the Indian stock market. Foreign Institutional Investors (FIIs) have turned out to be net sellers in the last four months; however, the pace of selling has slowed down in October. The amount of stake pared by the FIIs in October came in at Rs. 2,346.89 crores, significantly lower than the average selling of Rs. 43,290.32 crores seen in the July-September period.
Meanwhile, foreign investors have also started the November series with net selling in the Indian equity market. On Monday, FIIs sold shares worth Rs. 1,883.78 crores.
Daily digest market movers: US Dollar Index refreshes three-month high near 100.00
- Though the Indian Rupee has gained significantly against the US Dollar in the opening session due to the RBI’s intervention into the local spot market, the latter also outperforms against its peers as traders pare bets supporting more interest rate cuts by the Federal Reserve (Fed) this year.
- In Tuesday’s Asian session, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posts a fresh three-month high near 100.00.
- According to the CME FedWatch tool, the probability of the Fed to cut interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has eased to 67.3% from 94.4% seen a week ago.
- Fed dovish bets started easing after Chairman Jerome Powell commented in the press conference last week that the December rate cut is “far from a foregone conclusion” as officials had “strongly different views” in the monetary policy meeting.
- Meanwhile, San Francisco Fed Bank President Mary Daly and Fed Governor Lisa Cook have expressed that the December’s policy will be more data-dependent. Cook stated in her prepared remarks at the Brookings Institution that “risks to both sides of the dual mandate, employment and inflation, are elevated”. Cook explained that the Fed is at a position where keeping rates too high increases the likelihood that the “labor market will deteriorate sharply”, while lowering rates too much would increase the likelihood that “inflation expectations will become unanchored”.
- Going forward, investors will focus on the ADP Employment Change data for October to get fresh cues on the current labor market status. The significance of the private employment data would be high as the Nonfarm Payrolls (NFP) data is unlikely to release again due to the ongoing federal shutdown. The ADP report is expected to show that the private sector added 24K fresh workers against laying off 32K employees in September.
Technical Analysis: USD/INR declines to near 88.50
USD/INR falls sharply to near 88.50 on Tuesday. The pair tests the 20-day Exponential Moving Average (EMA), which trades around 88.54.
The 14-day Relative Strength Index (RSI) falls after failing to break above 60.00, suggesting selling pressure at higher levels.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the all-time high of 89.12 will be a key barrier.
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.