The USD/INR pair ended Wednesday’s session with modest gains around 90.55. On Thursday, Indian stocks, commodity, and currency markets are closed due to the Mumbai Municipal elections.
The pair is expected to start Friday’s session on a cautious note as the Indian Rupee (INR) is expected to attract slight bids due to a sharp correction in the Oil price. WTI oil price retraces sharply to near $59.70 after revisiting the three-month high of $62.20 as United States (US) President Donald Trump calms fears of military action in Iran, following assurance that they will stop killings of protesters.
Earlier this week, US President Trump threatened to attack the government of Supreme Leader Ayatollah Ali Khamenei for executing protesters amid civil unrest in various cities of Iran. Easing fears of US military action has calmed fears of supply chain disruptions.
Currencies from economies that rely heavily on imports of Oil to cater to their energy needs come under pressure in a high oil price environment.
Broadly, the outlook of the Indian Rupee is expected to remain fragile amid the absence of a trade deal announcement between the US and India. This week, negotiators from the US and India claimed that trade talks on Tuesday remained positive, and they will conduct the next meeting very likely in February, a scenario that is favorable for the Indian Rupee, but failing to improve the sentiment of overseas investors toward the Indian stock market.
The reaction from Foreign Institutional Investors (FIIs) remained negative toward the Indian equity market despite signs of improving US-India trade deal hopes. On Wednesday, FIIs offloaded their stake worth Rs. 4,781.24 crore, according to data from NSE. So far in January, FIIs have remained net sellers in nine out of 10 trading days, and have pared their stake worth Rs. 21,706.27 crore.
Meanwhile, the US Dollar (USD) trades firmly on expectations that the Federal Reserve (Fed) will pause its monetary-easing campaign in the policy meeting later this month. As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to its monthly high at 99.26.
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.