The Indian Rupee (INR) opened sharply higher on Wednesday as the USD/INR pair surged to around 88.80. This surge occurs against the backdrop of persistent alarm about the cumulative drain of foreign money from the Indian equity market. Market observers think this trend is due to a lack of announcement coming over a US-India FTA. Consequently, the Rupee has been rendered more susceptible.
Investors tend to be very concerned with key economic metrics. The all-time high of 89.12 now acts as an important support for the USD/INR pair. The 21 August low of 87.07 should serve as important support for the currency pair. For that reason, traders should watch this level extremely closely in the near term.
Market Dynamics and Technical Indicators
All that said, the recent price movement of USD/INR is indicative of and driven by some of these underlying market dynamics. Constructive price action The 14-day Relative Strength Index (RSI) is now aiming to break above 60.00, a significant point of demarcation showing that bullish momentum may be taking hold. If the RSI does manage to break this level, then it might indicate the start of a fresh wave of buying interest. Speculators may flood into the currency pair.
Nevertheless, the near-term trend looks bullish. That’s especially the case if the USD/INR remains above the 20-day Exponential Moving Average (EMA) at around 88.65. Additionally, this technical positioning implies that there is room for traders to stay bullish in the near term.
In particular, higher interest rates drastically reduce the present value of the Rupee. This is particularly the case for real rates that adjust for inflation. Significant and sustained growth could lead to an uptick in foreign investments. This is a net favorable condition to demand for the Rupee, which will improve the USD/INR rate in the long term.
Foreign Fund Flows and Inflation Expectations
The primary overhang on market sentiment is the return of foreign institutional investors (FIIs) as net sellers. According to the latest data, FIIs net sold shares worth Rs. 803.22 crore, adding to the downward pressure on the Rupee. This $6 billion outflow is symptomatic of continuing investor fears over India’s economic outlook.
Economists forecast India’s retail inflation to increase by 0.48% YoY. This spike is a bit lower than the 1.54% increase seen in September. These inflation numbers can have a big impact on USD/INR as they hint at the strength of a country’s domestic purchasing power and economic stability. A sharper increase in inflation from India’s peers might provide an early warning to currency devaluation troubles.
Even in light of these headwinds, the DXY is proving its stickiness. It is marginally higher at about 99.55 traded, in terms of the Greenback against six major currencies. More than anything else, this example highlights the impact of broader global forces on the performance of local currencies.
U.S. Federal Reserve Influence
Another key aspect to consider is how the Federal Reserve’s monetary policy is influencing market expectations for USD/INR. So speculation about an interest rate cut in the Fed’s December meeting is ramping up. Consequently, investors are taking a wait-and-see approach to the US dollar.
As Nela Richardson, ADP’s chief economist, noted, “The labor market struggled to produce jobs consistently during the second half of the month.” Comments like these are indicative of broader economic uncertainties that will further hinder or bolster certain Federal Reserve policy decisions moving forward and in turn affect USD/INR.
The Reserve Bank of India (RBI) has slashed its Repo Rate by 100 basis points this year, down to 5.5%. This modification has the potential to start having a huge impact on the USD/INR exchange rate’s direction. Interest rate cuts adversely affect currency value. Lower interest rates typically lead to a weaker currency. This occurs because depreciations make the currency less attractive to foreign investors seeking higher returns.