On Tuesday, the Indian Rupee (INR) faced continued pressure. That was the fourth consecutive day of losses against the US Dollar (USD). According to the latest currency trading data, as USD/INR quoted at 91.25 during the opening session, it was a record high for the pair. This surge comes despite India’s improved trade deficit position, raising concerns among investors regarding the currency’s stability.
It is FIIs whose behavior is playing a far bigger role in determining the INR’s value. Thus they have sold stakes amounting to Rs. 21,073.83 crore in the Indian equity market. Traders are getting squeezed by extended bearish sentiment. The latter have begun to doubt the rupee’s future course, particularly as major indicators suggest possible turbulence in the coming period.
Market Dynamics and Technical Indicators
Understanding the current market dynamics surrounding the USD/INR exchange rate reflects a unique, complicated time due to varying effects. Meanwhile, the 20-day Exponential Moving Average (EMA) at 90.0726 currently reinforces a bullish bias for the USD/INR pair. Analysts are counting on any pullbacks to find firm footing on the first few tests of this average. This would give the exchange rate a potential floor.
Market participants are cautious. A daily close below the 20-day EMA would signal a deeper correction towards the round-level figure of 90.00 for USD/INR. On the other hand, should the USD manage to keep its strength above the present resistance, it might continue its climb toward 92.00.
Investors are looking to the 14-day Relative Strength Index (RSI), which reads 73.89, suggesting overbought conditions. This would indicate robust momentum, but it hints at some likely tempering of the short-term upside for USD/INR.
Trade Deficit Improvement and Economic Signals
Even with these pressures putting downward pressure on the INR, recent economic data tells a more nuanced story. India’s merchandise trade deficit narrowed sharply to $24.53 billion in November, from $41.68 billion in October. Geopolitical crises and global supply chain disruptions have contributed to a narrowing trade gap. As a result, overall goods exports exploded by 19% over that same span.
Further, transport of goods to the United States experienced a significant jump of 22.6%. These positive trade indicators should bring some support for the INR, though trouble from still-high inflation persists. If India’s inflation continues to outpace that of its peers, it could negatively impact the currency’s value.
November’s HSBC Composite Purchasing Managers’ Index (PMI) for India dropped from 59.7 to 58.9. This sharp decline is the latest indication of a cooling in broader economic activity. The conflicting economic signals together make it very difficult to predict continued growth or currency stability.
Global Influences and Monetary Policy Implications
External factors would have a considerable impact on the INR’s performance against the USD. The US Dollar Index (DXY) has been trading closely to an eight-week low of 98.13, indicating some weakness in the dollar’s overall strength. However, comments from officials such as New York Fed Bank President John Williams highlight ongoing concerns about inflation and labor market dynamics.
“Monetary policy is very focused on balancing jobs.” – John Williams
In this context, central banks around the world are navigating balancing acts between ensuring recovery and fighting inflation. As a result, their policies matter greatly to currencies like the INR. Or finally, much higher interest rates, particularly real rates in India, could make the rupee more attractive. Unmistakably, the elevated inflation trend could eat heavily into these new benefits.
The market continues to be on edge as traders try to figure how these forces come together in the next few days and weeks. Both domestic economic indicators and global trends will have a pivotal impact on the direction of the Indian Rupee. These three things are going to determine how it will do against the US Dollar.