USD/INR climbs ahead of Indian GDP data, Indian Rupee tumbles to near record low

• The Indian Rupee weakens near a record low in Friday’s early European session. 
• A negative trend in domestic equities and rising USD demand from importers weigh on the INR. 
• India’s Federal Fiscal Deficit for October and GDP growth data for Q2 FY25 will be released later on Friday. 

The Indian Rupee (INR) extends its decline near its all-time low on Friday. The rise in US Treasury bond yields, the month-end US Dollar (USD) demand and Foreign Portfolio Investors (FPIs) selling domestic equities exert some selling pressure on the local currency. Despite these challenges, the Reserve Bank of India (RBI) is likely to routinely intervene in the foreign exchange (forex) market by selling USD to prevent the INR from depreciating amidst global volatility.

Later on Friday, India's Federal Fiscal Deficit for October and Gross Domestic Product (GDP) growth data for the July-September 2024 quarter (Q2 FY25) will be in the spotlight. If the GDP report shows a stronger-than-expected outcome, this could help limit the INR's losses. 

Indian Rupee seems vulnerable amid multiple challenges

• Foreign investors withdrew nearly $1.4 billion from Indian equities on Thursday, preliminary exchange data showed, spurring a 1.5% fall in the BSE Sensex index. These investors took out $11 billion from Indian equities last month. 
• India's Gross Domestic Product (GDP) growth is estimated to align with the RBI's target of 7.0% for the second quarter of FY25.
• India's economy is likely to grow at its slowest pace in one and a half years in the three months to the end of September as weak consumption offsets a strong recovery in government spending, according to a Reuters poll.
• The RBI is set to hold interest rates on December 6 due to a sharp rise in consumer inflation, per Reuters. 
• The markets now see nearly a 66.5% chance that the Fed will cut rates by a quarter point in December, up from 55.7% before the PCE data, according to the CME FedWatch Tool.

USD/INR maintains the bullish sentiment in the longer term

The Indian Rupee softens on the day. The strong uptrend of the USD/INR pair prevails, with the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The 14-day Relative Strength Index stands above the midline near 62.90, suggesting that the support is likely to hold rather than break. 

In the bullish case, the crucial resistance level emerges at the 84.50-84.55 region. Consistent trading above this level could attract enough momentum traders to push USD/INR to the 85.00 psychological mark. 

On the flip side, sustained trading below the lower limit of the trend channel of 84.27 could open the possibility of a retest of 83.96, the 100-day EMA. A break below the mentioned level could lead to a downside breakout. The next support level to watch is 83.65, the low of August 1. 

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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