USD/INR climbs as traders await Fed rate decision
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Lallalit Srijandorn
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19 Mar @ 01:21 (GMT+0)

USD/INR climbs as traders await Fed rate decision

  • The Indian Rupee softens on Wednesday’s early European session. 
  • Geopolitical risks and Trump’s tariff threats weigh on the INR, but persistent weakness in USD might help limit its losses. 
  • The Fed rate decision will take center stage later on Wednesday. 

The Indian Rupee (INR) loses ground on Wednesday after reaching over a three-week high in the previous session. The escalating geopolitical tensions in the Middle East weigh on the Indian currency. The upcoming reciprocal tariffs from US President Donald Trump on April 2 could also exert some selling pressure on the INR in the near term.   

However, a broadly weaker Greenback and an uptick in exporter US Dollar (USD) sales could provide some support to the local currency. Additionally, India’s latest current account data, which showed a surplus in February, might contribute to the INR’s upside.

All eyes will be on the Federal Reserve (Fed) interest rate decision on Wednesday, which is expected to hold interest rates steady. Investors will closely monitor the Press Conference and Summary of Economic Projections (SEP), or ‘dot-plot’ as it might offer some hints about views on the economy and possibly the future path for interest rates.

Indian Rupee weakens ahead of Fed rate decision

  • India’s Wholesale Price Index (WPI) inflation rose to 2.38% in February from 2.31% in January, the Ministry of Commerce and Industry reported on Monday. This figure came in hotter than the estimation of 2.36%.
  • A White House official said late Tuesday that reciprocal tariffs still intended to take effect from April 2
  • US Industrial Production rose by 0.7% MoM in February, versus 0.3% prior (revised from 0.5%), according to the Federal Reserve on Tuesday. This reading came in better than the market expectation for a growth of 0.2%.
  • Building permits in the US fell by 1.2% to a seasonally adjusted annualized rate of 1.456 million in February, slightly higher than market expectations of 1.450 million. It was the biggest drop in five months.
  • US Housing Starts jumps by 11.2% to an annual rate of 1.501 million in February after plunging by 11.5% to a revised rate of 1.350 million in January.
  • The odds of a rate cut at the May meeting have risen to 25% from 18% a month ago, according to the CME FedWatch Tool. 

USD/INR remains constructive in the longer term 

The Indian Rupee weakens on the day. In the longer term, the USD/INR pair keeps the bullish vibe on the daily chart, with the price holding above the key 100-day Exponential Moving Average (EMA). However, in the near term, the pair has broken out of a symmetrical triangle, while the 14-day Relative Strength Index (RSI) stands below the midline near 42.60, suggesting that further downside cannot be ruled out. 

The key resistance level for USD/INR is seen near the 87.00 psychological level. Consistent trading above this level could pave the way to 87.38, the high of March 11, en route to 87.53, the high of February 28.

On the flip side, the initial support level is located at 86.48, the low of March 18. A breach of the mentioned level could open the door for a move toward 86.14, the low of January 27, followed by 85.60, the low of January 6. 

Indian economy FAQs

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.

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.

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.

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.