• Indian Rupee strengthens in Monday’s early European session. 
  • Prospects of foreign equity inflows and a weaker US dollar underpin the INR. 
  • Investors will closely monitor if Trump’s administration reaches new trading agreements with India. 

The Indian Rupee (INR) edges higher on Monday. The renewed foreign inflows and the US Dollar (USD) weakness continue to support the local currency. Concerns over the economic impact of new tariffs on the US economy dragged the Greenback lower.  

US Vice President JD Vance arrives in New Delhi on Monday amid the global trade war that US President Donald Trump sparked. The US threatens to raise the 10% tariffs on Indian exports to 26% if no deal is reached by the end of the 90-day pause Trump put in place earlier this month. Vance is set to meet India’s Prime Minister Narendra Modi later in the day. The talks between the two leaders are likely to focus on the early finalisation of the proposed bilateral trade pact and ways to bolster India-US relations. 

A New Delhi official told Bloomberg News that sector-specific trade negotiations would begin this week, with a goal of wrapping those talks by the end of May. Finance Minister Nirmala Sitharaman will also attend IMF meetings in Washington, where she is anticipated to discuss trade with top US officials.

Meanwhile, hawkish remarks from the US Federal Reserve (Fed) have reduced the likelihood of a Fed rate reduction in June, which might lift the USD in the near term. Additionally, markets will watch the Reserve Bank of India (RBI), which seems to be buying the USD to curb the INR rise. The US Richmond Fed Manufacturing Index for April is due on Tuesday. On Wednesday, India’s HSBC Purchasing Managers’ Index (PMI) for April and US S&P Global PMI reports will be the highlights. 

Indian Rupee trades stronger amid unpredictable US tariffs

  • "The key thing to watch today is whether it (USD/INR) breaks below 85 and holds there," said a currency trader at a bank. "If it (does), I expect exporters to step in quickly — especially considering how much pressure the dollar is under."
  • Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that FII inflows and global trends offer support to the INR. “This reversal has been driven by the weakening dollar index and expectations of further dollar softness, which are encouraging FIIs to shift from the US to emerging markets like India,” Vijayakumar said.
  • Moody’s Ratings said the Indian economy could grow in the band of 5.5% to 6.5% during the calendar year 2025, lower than its February projection of 6.6%.
  • San Francisco Fed President Mary Daly said on Friday that while she is still comfortable with a couple of interest rate cuts this year, rising risks of inflation mean the Fed may need to do less, especially given the uncertainty over President Donald Trump's trade policy. 
  • Financial markets expect the Fed to resume rate cuts in June and that by year-end the policy rate, currently in the 4.25%-4.50% range, will be a full percentage point lower.

USD/INR’s bearish bias lingers under the 100-day EMA

The Indian Rupee trades on a stronger note on the day. The USD/INR pair keeps the bearish vibe on the daily chart, with the price holding below the key 100-day Exponential Moving Average (EMA). The downward momentum is supported by the 14-day Relative Strength Index (RSI), which stands below the midline near 38.10. 

The key support level for USD/INR emerges in the 85.00-84.95 zone, representing the psychological level and the lower limit of the descending trend channel. A breach of this level could expose 84.53,  the low of December 6, 2024. Further south, the next downside target to watch is 84.22, the low of November 25, 2024. 

On the bright side, the first upside barrier is located at 85.87, the 100-day EMA. Any follow-through buying above the mentioned level could see a rally to 86.55, the upper boundary of the trend channel. The additional upside filter to watch is 86.71, the high of April 9. 

Tariffs FAQs

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.

Source: Fxstreet