• The Indian Rupee loses traction in Wednesday’s early European session.
  • Renewed US Dollar demand, significant foreign fund outflows and higher crude oil prices undermine the INR.
  • Investors are bracing for the FOMC Minutes, which are due later on Wednesday.

The Indian Rupee (INR) trades in negative territory on Wednesday. The US Dollar (USD) demand due to the maturity of positions in the non-deliverable forwards (NDF) market and a decline in most Asian peers weigh on the INR. Additionally, persistent outflows from local stocks and a recovery in crude oil prices contribute to the local currency’s downside.

On the other hand, potential USD selling intervention by the Reserve Bank of India (RBI) might help limit the INR’s losses. Investors will keep an eye on the FOMC Minutes, which will be released later on Wednesday. Also, the US Housing Starts and Building Permits will be published.

Indian Rupee remains weak amid global economic dynamics

  • India’s Gross Domestic Product (GDP) is projected to grow at 6.6% in the October-December quarter of 2024-25, down from 8.6% recorded in the same period of 2023-24, according to the Bank of Baroda on Tuesday. 
  • ICRA has projected the year-on-year (YoY) expansion of the GDP to rise to 6.4% in the third quarter of the current fiscal year (Q3FY25) from the seven-quarter low of 5.4% in Q2FY25.
  • The NY Empire State Manufacturing Index climbed to 5.7 in February versus -12.6 in January, according to the Federal Reserve Bank of New York on Tuesday.
  • San Francisco Fed President Mary Daly said on Tuesday that prospects of further rate cuts in 2025 remain uncertain despite an overall positive lean to US economic factors.

USD/INR’s constructive outlook prevails despite consolidation in the shorter term

The Indian Rupee softens on the day. Technically, the USD/INR pair keeps the bullish bias on the daily timeframe, with the price holding above the key 100-day Exponential Moving Average (EMA). Additionally, the upward momentum is further supported by the 14-day Relative Strength Index (RSI), which is above the midline around 56.0, indicating that further upside looks favorable.

The immediate resistance level emerges near the 87.00 psychological level. More green candlesticks and sustained trading above the mentioned level could draw in more bullish demand and push USD/INR back to an all-time high near 88.00, en route to 88.50. 

In case of a further downswing, the first downside target to watch is 86.58, the low of February 17. Extended losses could see a drop to 86.35, the low of February 12, followed by 86.14, the low of January 27. 

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.

 

Source: Fxstreet