USD/INR extends the rally as US Dollar demand rises
Article Banner
Lallalit Srijandorn
webinar date
17 Jan @ 01:53 (GMT+0)

USD/INR extends the rally as US Dollar demand rises

  • The Indian Rupee trades softer in Friday’s early European session.
  • USD demand from foreign banks might weigh on the INR, but the RBI’s intervention could help limit its losses. 
  • The US housing data and Industrial Production for December are due later on Friday. 

The Indian Rupee (INR) edges lower on Friday. The US Dollar (USD) bids from importers and foreign banks, particularly oil companies, could weigh on the local currency. Additionally, the geopolitical uncertainties and potential US trade tariffs by US President-elect Donald Trump could undermine the INR in the near term. Nonetheless, the likely intervention from the Reserve Bank of India (RBI) to sell the US Dollar (USD) via state-run banks might help contain excess losses. 

Looking ahead, traders brace for the US housing data for December later on Friday, including Building Permits and Housing Starts. Also, the US Industrial Production will be published.

Indian Rupee remains fragile amid importer demand

  • "Most foreign banks were buying dollars, while the RBI sold dollars to cap depreciation near 86.50/$1 levels, after which some more depreciation was seen up to 86.55/$1," said Anil Bhansali, head of treasury at Finrex Treasury Advisors.
  • India's trade deficit narrowed to $21.94 billion in December from $37.84 billion in November, owing to a significant decline in gold and oil import bills, according to the Ministry of Commerce and Industry on Wednesday.
  • US Retail Sales rose by 0.4% MoM in December versus a 0.8% increase prior (revised from 0.7%), according to the US Census Bureau on Thursday. This reading was weaker than the market expectations of a 0.6% rise. 
  • The US Initial Jobless Claims rose to 217K for the week ending January 10, compared to the previous week's tally of 203K (revised from 201K). This reading came in above the market consensus of 210K. 
  • Fed Governor Christopher Waller said on Thursday that the US central bank could cut interest rates multiple times this year if inflation eases as he is expecting. 
  • Fed Chicago President Austan Goolsbee noted that he is becoming more confident that the labor market is stabilising, per Reuters. 

USD/INR keeps the constructive bias, overbought RSI warrants caution for bulls in the short term

The Indian Rupee trades on a softer 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. However, the 14-day Relative Strength Index (RSI) reaches overbought territory beyond the 70.00 mark, potentially signalling a temporary weakness or further consolidation in the near term. 

In the bullish case, the immediate resistance level emerges at an all-time high of 86.69. A decisive break above the mentioned level potentially draws in some buyers to the 87.00 psychological level. 

If bearish momentum continues, the pair might see a drop to 86.30, the low of January 15. Further south, the next downside target to watch is 85.85, the low of January 10, followed by 85.65, the low of January 7. 

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.