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25 Feb 2025
USD/INR extends upside amid firm US Dollar demand
- The Indian Rupee weakens in Tuesday’s Asian session.
- Renewed US Dollar demand and persistent foreign outflows continue to weigh on the INR.
- The Conference Board’s Consumer Confidence is due later on Tuesday.
The Indian Rupee (INR) edges lower on Tuesday. The local currency remains under pressure amid US Dollar (USD) demand from oil companies and external foreign investor pressures. The concern over Foreign Portfolio Investment (FPI) outflows continues to undermine the INR.
However, a likely foreign exchange intervention by the Reserve Bank of India (RBI) might help limit the INR’s losses. The Conference Board’s Consumer Confidence will be the highlight later on Tuesday, followed by the FHFA’s House Price Index and the Richmond Fed Manufacturing Index. The Federal Reserve (Fed) officials Michael Barr, Thomas Barkin and Lorie Logan are scheduled to speak on the same day.
Indian Rupee remains fragile amid global cues and foreign fund outflows
- The RBI will conduct a $10 billion 3-year buy/sell swap on Friday, which would infuse around 870 billion rupees of liquidity in the banking system.
- India's economic growth is estimated to recover in the third quarter of the current financial year 2024-25 (Q3FY25), with Gross Domestic Product (GDP) growth projected at 6.2%, up from 5.4% in Q2FY25, according to the Union Bank of India.
- The HSBC India Manufacturing Purchasing Managers Index (PMI) declined to 57.1 in February from 57.5 in January. The Indian Services PMI climbed to 61.1 in February versus 56.5 prior. The Composite PMI rose to 60.6 in February from 57.7 in January.
- Chicago Fed President Austan Goolsbee said late Monday that the US central bank needs more clarity before considering cutting interest rates again.
- The Chicago Fed National Activity Index came in at -0.03 in January versus 0.18 prior (revised from 0.15).
USD/INR sticks to a positive bias despite consolidation in the near term
The Indian Rupee trades in negative territory for the day. The constructive outlook of the USD/INR pair remains in play as the price holds above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Nonetheless, the 14-day Relative Strength Index (RSI) hovers around the midline near 50.0, suggesting that further consolidation or downside is on the cards.
The immediate resistance level for USD/INR emerges near the 87.00 psychological level. If the pair keeps printing bullish candlesticks, we could see enough buying pressure to push the price to an all-time high near 88.00, en route to 88.50.
If bullish momentum fizzles and the low of February 12 at 86.35 doesn’t hold as support, the pair might slip under 86.14, the low of January 27. The additional contention level to watch is 85.65, the low of January 7.
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.