Introduction to USD/INR Pair
The USD/INR pair experienced a 0.2% correction to near 88.83 on Wednesday. This correction came after the Reserve Bank of India’s (RBI) monetary policy announcement, which led to selling pressure on the pair. The Indian currency markets were closed on Thursday due to Dusshera and Mahatma Gandhi Jayanti.
RBI Monetary Policy Announcement
The RBI held its Repo Rate steady at 5.5%, as expected, and maintained a "neutral guidance" on the monetary policy outlook. The decision to hold interest rates was made in the wake of steady domestic growth, subdued inflation, and heightened global risks. The RBI also raised the Gross Domestic Product (GDP) growth projection for the current financial year to 6.8% from the prior forecast of 6.5%. Additionally, the RBI warned that trade tensions with the United States have raised uncertainty in the export market, but expressed confidence that its impact on economic growth will be offset by announced Goods and Services Tax (GST) rate cuts.
Factors Affecting USD/INR Pair
The US Dollar has remained under pressure due to the US government shutdown and increasing hopes of more interest rate cuts by the Federal Reserve (Fed) this year. The USD/INR pair has been trading sideways after posting a fresh all-time high near 89.10 last week. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 88.50. The 14-day Relative Strength Index (RSI) stays above 60.00, suggesting a strong bullish momentum.
Technical Analysis
Looking down, the pair could slide to near the September 12 high of 88.57 and the 20-day EMA, if it breaks below the September 25 low of 88.76. On the upside, the pair could extend its rally towards the round figure of 90.00 if it breaks above the current all-time high of 89.12.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil, the value of the US Dollar, 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.
Factors Influencing 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 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
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.
Inflation and 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.
Conclusion
In conclusion, the USD/INR pair is influenced by various factors, including the RBI’s monetary policy, global risks, and macroeconomic factors. The pair’s near-term trend remains bullish, but it could slide if it breaks below certain levels. Understanding the factors that influence the Rupee, such as inflation, interest rates, and foreign investment, can help investors make informed decisions. As the Indian economy continues to grow and the RBI works to maintain a stable exchange rate, the USD/INR pair is likely to remain volatile, presenting opportunities for investors to profit from its fluctuations.
