- The Indian Rupee opens on a positive note against the US Dollar.
- India is in no rush to sign a trade pact with the US.
- FOMC minutes suggest that officials are worried about tariff-led inflation.
The Indian Rupee (INR) opens higher against the US Dollar (USD) on Thursday. The USD/INR pair drops to near 85.70, while investors await the confirmation of the trade deal between India and the United States (US) to gauge direction.
Last week, US President Donald Trump expressed more than once that Washington is close to striking a deal with India. However, comments from Indian Commerce and Supply Minister Piyush Goyal indicated that New Delhi is not in a rush to sign the deal, stating that an agreement will not close until it gains confidence that the pact is in the national interest.
“India does not negotiate under deadlines,” Goyal said and added, “We negotiate keeping national interest in mind, and national interest is paramount in all our engagements across the world.”
A report from NDTV showed on Thursday that both nations aim to lower overall duty barriers to promote a healthy competitive environment. Additionally, New Delhi was seeking to safeguard its agriculture sector and labor-intensive companies, such as leather, footwear, and clothes, from exposure to competition from US companies.
Meanwhile, growing hopes of a decline in the Oil price in the near term as the OPEC+ announces a bigger-than-expected increase in Oil production are expected to support the Indian Rupee. Currencies from nations that depend largely on Oil imports, such as the Indian Rupee, perform strongly in a lower Oil price environment.
Daily digest market movers: Indian Rupee gains against US Dollar
- The Indian Rupee moves higher against the US Dollar. While the US Dollar trades subduedly amid uncertainty surrounding the tariff policy.
- On Wednesday, US President Trump revealed another batch of reciprocal tariffs for seven countries that failed to secure a trade deal during the 90-day pause period. However, the impact of the announcement of fresh tariff rates is expected to be limited as it doesn’t contain countries with whom the US does meaningful business.
- Considering the current status of trade negotiations by Washington with nations like the Eurozone, China, Canada, and Mexico, US President Trump is unlikely to slap hefty tariffs on them. So far, major trading partners of the US that have been slapped with reciprocal tariffs are Japan and South Korea.
- Meanwhile, Donald Trump has also stated that proposed 50% tariffs on copper imports will become effective from August 1, the same date when his reciprocal tariffs will be executed, while claiming the scope of the base metal in a number of companies.
- On the monetary policy front, the Federal Open Market Committee (FOMC) minutes of the June 17-18 policy meeting has signaled that a majority of Federal Reserve (Fed) officials believe that interest rates cuts are appropriate later this year if tariff-driven inflation proved to be “limited and temporary”, Reuters reported. The minutes also stated that officials felt borrowing rates are not far above the neutral level. Only a “couple of participants noted they would be open to considering a rate cut as soon as the July meeting.”
- According to the CME FedWatch tool, the Fed is almost certain to leave interest rates in the current range of 4.25%-4.50% in the policy meeting later this month.
Technical Analysis: USD/INR faces pressure above 20-day EMA
USD/INR falls to near 85.70 at open on Thursday. The pair faces a sell-off above the 20-day Exponential Moving Average (EMA), which trades around 85.87, suggesting selling pressure at higher levels.
The 14-day Relative Strength Index (RSI) falls below 50.00. A fresh bearish momentum would emerge if the RSI breaks below 40.00.
Looking down, the May 27 low of 85.10 will act as key support for the major. On the upside, the June 24 low at 86.42 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.
