USD/INR rises as weak local equities drag Indian Rupee to all-time low

• The Indian Rupee tumbles to near the record low in Thursday’s early European session.
• Rising geopolitical tensions, Trump trades, and sustained portfolio outflows weigh on the INR. 
• Traders brace for the US data and Fedspeak later on Thursday. 

The Indian Rupee (INR) weakened to an all-time low on Thursday. The heightened geopolitical tensions and market reactions due to Donald Trump’s victory in the US presidential elections drag the local currency lower. Additionally, continuous foreign portfolio outflows might continue to undermine the INR in the near term.

Nonetheless, the Reserve Bank of India (RBI) is likely to intervene in the foreign exchange to mitigate further depreciation of the local currency, with state-run banks offering USD in the market. Later on Thursday, traders will monitor the US weekly Initial Jobless Claims, the Philadelphia Fed Manufacturing Index, Existing Home Sales, and the CB Leading Index, which are due later on Thursday. Also, the Federal Reserve’s (Fed) Beth Hammack and Austan Goolsbee are scheduled to speak.

Indian Rupee loses momentum amid sustained portfolio outflows and geopolitical risks

• RBI Governor Shaktikanta Das said on Thursday that resilient growth in the Indian economy has provided the Indian central bank with the flexibility to focus on inflation, aiming for a sustainable decline towards the target of 4%.
• Foreign investors withdrew nearly $4 billion from local assets so far in November, adding to $11.5 billion in outflows last month.
• India's economic growth is expected to pick up in the current quarter after a slowdown in July-September, the RBI said in its monthly bulletin on Wednesday. 
• The Indian central bank projected third-quarter Gross Domestic Product (GDP) growth at 7.6%, faster than an estimated 6.7% in the second quarter.
• Domestic rating agency ICRA on Wednesday said India's real GDP growth for the September quarter is likely to decline to 6.5% due to heavy rains and weaker corporate performance.
• Moody's estimated the Indian economy will grow by 7.2% in 2024 due to a rebound in household consumption and moderating inflation.
• Indian Rupee fell by 7.8% during FY23 and by 1.4% in FY24. It has depreciated by 1.5% so far in FY25, according to the RBI. 
• Federal Reserve Board of Governors member Michelle Bowman said on Wednesday that inflation is still elevated and moving sideways in the last few months and the US central bank should pursue a cautious approach to monetary policy.
• Futures traders are now pricing in a 54% chance that the Fed will cut rates by a quarter point, down from around 80% last week, according to data from the CME FedWatch Tool. 

USD/INR’s broader trend remains constructive

The Indian Rupee softens on the day. The USD/INR pair keeps the bullish vibe as the price holds above the ascending channel throwback support on the daily time frame. The 14-day Relative Strength Index (RSI) is located above the midline around 66.70, suggesting that the further upside looks favorable.

The all-time high of 84.45 appears to be a tough nut to crack for the bulls. A decisive break above this level could still take the pair up to the 85.00 psychological level.

On the other hand, sustained bearish momentum below the resistance-turned-support level at 84.35 could pave the way to the 84.00-83.90 zone, representing the round mark and the 100-day EMA. 

Indian economy FAQs

How does the Indian economy impact the Indian Rupee?

The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.

What is the impact of Oil prices on the Rupee?

India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.

How does inflation in India impact the Rupee?

Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.

How does seasonal US Dollar demand from importers and banks impact the Rupee?

India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.

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