USD/INR drifts higher as Trump threatens China with tariffs
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Lallalit Srijandorn
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22 Jan @ 02:52 (GMT+0)

USD/INR drifts higher as Trump threatens China with tariffs

  • The Indian Rupee trades flat in Wednesday’s early European session.
  • Renewed USD demand and Trump’s tariff announcements might weigh on the INR. 
  • The routine RBI intervention and lower crude oil prices might cap the downside for local currency. 

The Indian Rupee (INR) flat lines on Wednesday. The persistent US Dollar (USD) buying from foreign portfolio investors and local oil companies weighs on the lNR. Additionally, US President Donald Trump’s plan to impose tariffs on China might exerts some selling pressure on Asian peers, including the Indian Rupee. 

Nonetheless, the downside for the INR might be limited as the Reserve Bank of India (RBI) could intervene in the foreign exchange market via USD sales to prevent the local currency from significant depreciation. A decline in crude oil prices might also help limit the INR’s losses as India is the world's third-largest oil consumer. Investors will closely monitor the preliminary reading of HSBC India’s Purchasing Managers Index (PMI) and US S&P PMI data for January, which will be published later on Friday. 

Indian Rupee looks fragile amid multiple headwinds

  • Forex traders said the overall uncertainty about the global economy continued to weigh on both currencies and commodities, keeping investors on edge.
  • India's GDP is estimated to grow at 6.5-6.8% in the current fiscal year, according to Deloitte India on Tuesday.
  • Moody's lowered India's economic growth forecast to 7.0% for the fiscal year ending March 2025, down from 8.2% recorded in the previous fiscal year.
  • Overseas investors have sold a net total of about $6.5 billion worth of local equities and bonds in January, the largest monthly outflow since October 2023.
  • Trump stated on Tuesday that his administration is discussing imposing a 10% tariff on goods imported from China on February 1 because fentanyl is being sent from China to Mexico and Canada, per Reuters. 

USD/INR price action remains constructive in the longer term 

The Indian Rupee trades on a flat note on the day. The path of least resistance is to the upside as the USD/INR pair has formed higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. Additionally, the 14-day Relative Strength Index (RSI) is located above the midline near 67.00, indicating bullish momentum in the near term. 

The all-time high of 86.69 appears to be a tough nut to crack for bulls. A sustained break above the mentioned level could open the door for a rally toward the 87.00 psychological level. 

On the flip side, a move back below 86.18, the low of January 20, could clear the way for a dip to the next support level at 85.85, the low of January 10. The next downside target to watch is 85.65, the low of January 7. 

RBI FAQs

The role of the Reserve Bank of India (RBI), in its own words, is "..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.

The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.

Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.