USD/INR falls at open while US-China trade talks enter second day
- The Indian Rupee outperforms the US Dollar, while investors await the outcome of US-China trade talks.
- This week, investors will pay close attention to the US/India CPI data for May.
- The RBI will halt its VRR auctions, which it began earlier this year, starting from June 11.
The Indian Rupee extends its winning streak against the US Dollar (USD) for the fourth trading day on Tuesday. The USD/INR pair ticks down to near 85.55 after opening, even as the US Dollar edges higher during Asian trading hours. Still, the US Dollar Index (DXY) is broadly in a tight range between 98.80-99.30 as investors hesitate to build fresh positions before the release of the United States (US)-China meeting minutes.
Trade discussions between top negotiators from Washington and Beijing have extended to a second day in London, while the White House has signaled that the meeting will end positively.
White House economic adviser Kevin Hassett expressed confidence in an interview with CNBC on Monday that “export controls to be eased and rare earths to be released in volume” after the meeting.
On the economic front, investors keenly await the US Consumer Price Index (CPI) data for May, which will be released on Tuesday. Investors will pay close attention to the US inflation data as it will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
Daily digest market movers: Indian Rupee trades higher against its peers
- The Indian Rupee outperforms its peers during Asian trading hours on Tuesday. The Indian currency gains as investors await the release of the Consumer Price Index (CPI) data for May, scheduled for Thursday. As measured by the CPI, US inflation is estimated to have risen by 3% year-over-year, slower than the 3.16% growth seen in April.
- Soft inflation data would boost market expectations that the Reserve Bank of India (RBI) could lower the Repo Rate again in the next monetary policy announcement. In the policy meeting on Friday, the RBI changed its stance from “accommodative” to “neutral”, but signaled there is little room for more interest rate cuts.
- The RBI announced a pro-growth monetary policy last week in which it front-loaded interest rate cuts. The Indian central bank slashed the repo rate by 50 basis points (bps) to 5.5% and reduced its Cash Reserve Ratio (CRR) by 100 basis points (bps) to 3%.
- Meanwhile, the RBI has announced that it is concluding its daily variable rate repo (VRR) auctions from Wednesday. The central bank started VRR auctions on January 16 to fulfil the need for liquidity for the productive sector, given tight market conditions.
- In the US region, investors will keenly focus on Wednesday’s CPI data for May. According to the estimates, the US headline and core CPI rose at a faster pace of 2.5% and 2.9% year-on-year, respectively, a scenario that will discourage Federal Reserve (Fed) officials from lowering interest rates.
- This week, the University of Michigan (UoM) will release preliminary one-year and five-year Consumer Inflation Expectations data for June, which has been a key driver behind increasing confidence of financial market participants that the Fed will not cut interest rates in the near term.
- Investors have quoted new economic policies by US President Trump as inflationary for the economy, which have also restricted Fed officials from being outspoken on the monetary expansion approach.
Technical Analysis: Indian Rupee struggles around 20-day EMA
The USD/INR pair ticks down to near 85.55 during the Asian trading session. The pair wobbles around the 20-day Exponential Moving Average (EMA), indicating that the near-term trend is uncertain.
The 14-day Relative Strength Index (RSI) hovers inside the 40.00-60.00 range, indicating a sideways trend.
Looking down, the June 3 low of 85.30 is a key support level for the major. A downside break below the same could expose it to the May 26 low of 84.78. On the upside, the pair could revisit an over 11-week high around 86.70 after breaking above the May 22 high of 86.10.
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.