USD/INR falls amid likely RBI intervention, US Dollar selling
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Lallalit Srijandorn
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11 Feb @ 02:50 (GMT+0)

USD/INR falls amid likely RBI intervention, US Dollar selling

  • The Indian Rupee edges higher in Tuesday’s early European session. 
  • Trade tariff worries, sustained foreign outflows, and concerns on an Indian economic slowdown weigh on the INR. 
  • Investors await Fed Chair Jerome Powell’s semi-annual testimony on Tuesday. 

The Indian Rupee (INR) recovers on Tuesday, marking its biggest jump since November 2022, after falling to a fresh record low in the previous session. The strong intervention from the Reserve Bank of India (RBI) and US Dollar (USD) selling by exporters and profit-booking by speculators provide some support to the INR. The frequent interventions have weighed on India's Foreign exchange reserves, which are hovering near an 11-month low.

Nonetheless, the risk of fresh US trade tariffs could spur losses in most regional currencies, including the INR. Investors are concerned about the Indian economy as data signal that Asia’s third-largest economy is slowing. The country’s Gross Domestic Product (GDP) is forecast to expand by 6.4% in the year through March, the weakest pace since the pandemic. Additionally, the sustained portfolio outflows contribute to the local currency’s downside. Federal Reserve (Fed) Chair Jerome Powell’s semi-annual testimony will be the highlight later on Tuesday. 

Indian Rupee rebounds despite tariff threats

  • The Indian Rupee has declined continuously since Trump's victory in the US elections last November, falling by around 4.5% since then.
  • "We believe the risks to INR over the coming months are skewed towards relative weakness. If the broad USD were to weaken, we believe the downside in USD/INR would be mitigated by active RBI FX purchases," Nomura said in a note.
  • India has high tariffs that lock out imports, Trump's top economic adviser Kevin Hassett said on Monday, adding that India's Prime Minister had a lot to discuss with Trump when the two leaders meet soon.
  • India is considering tariff cuts in at least a dozen sectors, from electronics to medical equipment and chemicals, in order to promote US exports and align with India's domestic manufacturing ambitions.
  • India also plans to propose increasing energy product imports from the US, estimated at over $11 billion in the first eleven months of 2024, to alleviate trade imbalances.
  • On Monday, US President Donald Trump expanded his steel and aluminum tariffs to cover all imports, effectively canceling deals with the European Union, the United Kingdom, Japan and others.
  • The new executive order builds on the 25% tariff on steel and the 10% tariff the first Trump administration imposed in 2018 by raising duties, closing loopholes and eliminating exemptions, according to a White House official. 

USD/INR keeps the constructive view but bulls turn cautious amid a shooting star

The Indian Rupee gains traction on the day. According to the daily chart, the positive view of the USD/INR pair prevails as the price is above the key 100-day Exponential Moving Average (EMA), indicating that bulls have the upper hand. 

However, the 14-day Relative Strength Index (RSI) reaches overbought territory beyond the 70.00 mark, potentially signaling a temporary weakness or further consolidation in the near term. 

The first upside barrier for USD/INR emerges in the 87.95-88.00 zone, representing an all-time high and psychological level. If buyers step in, the pair could see a rally to 88.50. 

On the flip side, the initial support level to watch is 87.31, the low of February 7. If bearish momentum persists, the pair could fall back to the 87.05-87.00 regions, representing the low of February 5 and the round mark. Further south, the next contention level is seen at 86.51, the low of February 3. 

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.