USD/INR softens amid likely RBI’s intervention

• The Indian Rupee rebounds in Wednesday’s early European session.
• The dovish bets after the government named career bureaucrat Sanjay Malhotra as the new RBI governor might weigh on the INR.
• Possible intervention by the RBI might help limit the INR’s losses. 
• The US November CPI inflation report will take center stage on Wednesday. 

The Indian Rupee (INR) recovers some lost ground on Wednesday after reaching a fresh record low in the previous session. Significant weakness of the INR might be capped by the foreign exchange intervention by the RBI. The Indian central bank often intervenes by managing liquidity, including selling USD to prevent steep INR depreciation.

Nonetheless, the appointment of career bureaucrat Sanjay Malhotra as the next governor of the Reserve Bank of India (RBI) prompted traders to raise their bets on the interest rate cuts, which might undermine the local currency. Furthermore, a decline in its Asian peers and persistent strength in the US Dollar (USD) from importers and foreign banks could drag the INR lower. Later on Wednesday, all eyes will be on the US Consumer Price Index (CPI) for November. On the Indian docket, the CPI inflation data will be released on Thursday, along with Industrial Output and Manufacturing Output. 

Indian Rupee edges higher amid likely intervention by the RBI

• Economists expect Das’s exit could add a dovish tilt to India's monetary policy committee, as Das and RBI Deputy Governor Michael Patra were seen as the most hawkish members of the six-member rate-setting panel.
• Economists at Capital Economics anticipate a 25 bps cut in India’s repo rate at Malhotra’s first MPC meeting in February, if not in an unscheduled meeting earlier. Economists estimated that the cut would come in April under Das’ leadership.
• India’s 10-year bond yields were down 2 basis points (bps) at 6.699% on Tuesday, signaling market expectations of a rate reduction, according to data from LSEG. 
• S&P Global Ratings on Tuesday estimated 6.8% growth for the Indian economy in FY25, followed by 6.9% growth in FY26, on the back of strong urban consumption, steady service sector growth, and ongoing investment in infrastructure. 
• Financial markets are now pricing in nearly an 85.8% possibility of a 25 basis points (bps) rate cut by the Fed on December 17-18, according to the CME FedWatch tool.  

USD/INR keeps the bullish bias in the longer term

The Indian Rupee trades on a firmer note on the day. The USD/INR pair keeps the bearish vibe on the daily timeframe as the pair is well above the key 100-day Exponential Moving Average (EMA). However, the 14-day Relative Strength Index (RSI) stands above the midline near 72.75, indicating the overbought RSI condition. This suggests that further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.

The upper boundary of the ascending trend channel and the psychological level of 85.00 appear to be a tough nut to crack for the bulls. Sustained trading above this level could see a rally to 85.50.

On the flip side, the boundary of the trend channel and the low of December 9 at 84.65 act as an initial support level for USD/INR. A break below this support zone could drag the pair lower to the next bearish target at 84.22, the low of November 25, followed by 84.08, the 100-day EMA.

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

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.

How do the decisions of the Reserve Bank of India impact the Indian 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.

What macroeconomic factors influence the value of the Indian Rupee?

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.

How does inflation impact the Indian 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.

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