USD/INR weakens ahead of Indian WPI inflation release
- The Indian Rupee rebounds in Tuesday’s early Asian session.
- A surge in oil prices, continued outflows from foreign investors, and a rally in USD might weigh on INR.
- India’s WPI inflation data and US PPI reports will be in the spotlight later on Tuesday.
The Indian Rupee (INR) recovers some lost ground on Tuesday after reaching a fresh all-time low in the previous session. The Reserve Bank of India (RBI) is likely to intervene to slow down the INR's depreciation, selling the USD in the spot and the forward markets. However, the local currency remains fragile amid a rise in crude oil prices and a massive withdrawal of foreign capital from Indian equities. Additionally, a stronger US Dollar (USD) after upbeat US employment data led to an expectation that the US Federal Reserve (Fed) will go for fewer interest rate cuts this year, dragging the INR lower.
Looking ahead, traders will monitor India’s Wholesale Price Index (WPI) inflation data, which is due later on Tuesday. On the US docket, the Producer Price Index (PPI) for December will be released. Also, the Fed Kansas City President Jeff Schmid is set to speak later in the day.
Indian Rupee remains vulnerable amid multiple headwinds
- India’s retail inflation rate, measured by the Consumer Price Index (CPI), eased to 5.22% YoY in December from 5.48% in November, according to the Ministry of Statistics and Programme Implementation on Monday. This reading came in softer than the expectation of 5.3%.
- India’s Consumer Food Price Index (CFPI), which measures food inflation, recorded a year-on-year increase of 8.39% for December 2024.
- "RBI will allow the weakness as demand keeps moving up and supplies dwindle," said Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors LLP.
- The Indian central bank on Friday noted that the country's forex reserves in the week ended January 3 declined by USD 5.693 billion to USD 634.585 billion.
- Global funds have pulled about $2 billion from local shares so far this year and sold a net $705.5 million of fixed-income securities on January 8.
- Markets are now pricing in one rate cut from the Fed in 2025, down from roughly two quarter-point cuts priced at the start of the year.
USD/INR maintains the positive picture, overbought RSI warrants caution for bulls in the near term
The Indian Rupee trades firmer on the day. The bullish outlook of the USD/INR pair remains intact as the price has formed higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. Nonetheless, further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) moves beyond the 70.00 mark, indicating the overbought condition.
The first upside target to watch is an all-time high of 86.69. A decisive bullish breakout above this level could pave the way to the 87.00 psychological level.
On the other hand, the initial support level for the pair emerges at 85.85, the low of January 10. A move back below the mentioned level could see a drop to 85.65, the low of January 7, followed by 85.00, a round figure.
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.