- The Indian Rupee flatlines in Friday’s Asian session.
- Rising RBI rate cut bets, weakness of Asian peers and uncertainties could undermine the INR.
- RBI’s interest rate decision will be closely watched on Friday.
The Indian Rupee (INR) holds steady after falling to a fresh all-time low in the previous session. The local currency remains vulnerable amid expectations of a rate cut by the Reserve Bank of India (RBI). Furthermore, a broader decline among Asian currencies, the uncertainties surrounding US trade tariffs and continued portfolio outflows might undermine the INR.
Nonetheless, the routine intervention by the RBI to sell US Dollar via state-run banks might help limit the INR’s losses. The RBI interest rate decision on Friday will be in the spotlight. Investors will also scrutinize the statement from the new RBI Governor Sanjay Malhotra to assess the direction of the central bank’s monetary policy. The attention will shift to the US labour market data later in the day, including Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings.
Indian Rupee steadies ahead of RBI rate decision
- The RBI is expected to cut the interest rate by 25 basis points (bps) to 6.25% at the policy meeting concluding on Friday, in what would be its first rate cut in nearly five years.
- “The delay in implementation of universal tariffs by the incoming U.S. administration provides some tactical space for RBI to prioritize domestic growth… and space to cut policy rates,” said Ruhul Bajoria, an economist at Bank of America in India.
- Most of the economists surveyed by Bloomberg anticipate that the Indian central bank will lower the benchmark repurchase rate by at least 25 basis points (bps) to 6.25% on Friday.
- Chicago Fed President Austan Goolsbee noted on Thursday that the uncertainty makes the environment for the Fed foggier, a reason to slow the pace of cuts.
- Dallas Fed President Lorie Logan said that while inflation progress has been significant, the US labor market remains far too firm to push the Fed into rate cuts any time soon.
USD/INR paints a positive picture, overbought RSI warrants caution for bulls in the short term
The Indian Rupee trades on a flat note on the day. The constructive outlook of the USD/INR pair remains intact as the price holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. However, the 14-day Relative Strength Index (RSI) reaches overbought territory beyond the 70.00 mark, potentially signaling a temporary weakness or further consolidation in the near term.
The immediate resistance level for USD/INR emerges at 87.62, an all-time high. Sustained trading above this level could pave the way to the 88.00 psychological level.
On the downside, the initial support level for the pair is located in the 87.05-87.00 zone, representing the low of February 5 and the round mark. A breach of the mentioned level could drag USD/INR down to 86.51, the low of February 3.
Indian economy FAQs
The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.
India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.
Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.
India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.
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