USD/INR refreshes two-month high on rising Oil prices, foreign outflows
- The Indian Rupee slides to near 86.20 against the US Dollar as Israel-Iran conflict boosts Oil price.
- Tehran threatens to close the Strait of Hormuz to disrupt the Oil supply chain.
- Investors expect the Fed to leave interest rates steady on Wednesday.
The Indian Rupee (INR) posts a fresh two-month low, slightly above 86.20 against the US Dollar (USD) at the start of the week. The USD/INR pair faces selling pressure as the US Dollar ticks up amid an increase in its safe-haven demand, following the conflict between Israel and Iran.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges up to near 98.30. Last week, the USD Index gained ground after posting a fresh three-year low near 97.60.
No signs of efforts towards ending the conflict by both nations have forced investors to shift to the safe-haven fleet. Israeli Defence Minister Israel Katz warned that “Tehran will burn” if Iran continues firing missiles at Israel, Euronews reported.
Meanwhile, officials from Iran have threatened to shut down the Strait of Hormuz, from which around one-fifth of the world's oil is transported to global markets, a move that could potentially boost oil prices. “Closing the waterway is under consideration and Iran will make the best decision with determination,” Commander in the Islamic Revolutionary Guard Corps (IRGC) Sardar Esmail Kowsari said in an interview over the weekend, Arab News reported.
The scenario of rising Oil prices is unfavorable for the Indian Rupee, given that India is one of the leading Oil-importing nations in the world.
Daily digest market movers: Indian Rupee underperforms due to multiple headwinds
- The major trigger for the US Dollar will be the Federal Reserve’s (Fed) monetary policy announcement on Wednesday, in which the United States (US) central bank is expected to leave interest rates steady in the current range of 4.25%-4.50%.
- As the Fed is widely anticipated to keep borrowing rates on hold, investors will closely monitor the Fed’s dot plot, which shows where policymakers see interest rates heading in the near and long term.
- Market expectations will pay close attention to whether officials remain firm in their March projection that the central bank will cut interest rates at least once this year amid heightened uncertainty over the economic outlook due to the imposition of new economic policies by US President Donald Trump.
- Investors will also focus on Fed Chair Jerome Powell’s press conference for comments regarding the impact of rising crude oil prices on the inflation outlook. Theoretically, higher Oil Prices discourage the Fed from supporting interest rate cuts.
- Ahead of the Fed’s monetary policy, investors will focus on the Retail Sales data for May, which will be released on Tuesday. The Retail Sales data, a key measure of consumer spending, is expected to have declined by 0.7% on month after a 0.1% growth in April.
- Meanwhile, cooling inflationary pressures and consistent foreign outflows from the Indian market are factors responsible for Indian Rupee’s underperformance other than soaring Oil prices.
- Last week, the data showed that year-on-year CPI rose by 2.82% on year, the lowest level seen in over six years, signaling the need for further interest rate cuts by the Reserve Bank of India (RBI). The inflation report showed that modest growth in food inflation was the major factor contributing to slower CPI growth.
- In the Indian equity market, Foreign Institutional Investors (FIIs) have been net sellers in the last three trading sessions. FIIs have sold equities worth Rs. 4,812.39 crores this month till June 13, according to data from exchanges.
Technical Analysis: USD/INR strengthens after recovery from 20-day EMA
The USD/INR pair jumps to near 86.23 on Monday, the highest level seen in two months. The pair strengthens after a strong recovery move from the 20-day Exponential Moving Average (EMA) ON June 12 around 85.45.
The 14-day Relative Strength Index (RSI) breaks above 60.00, suggesting that a fresh bullish momentum has been triggered.
Looking down, the 20-day EMA is a key support level for the major. On the upside, the May 23 high of 86.44 will be a critical hurdle for the pair.
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.