USD/INR drifts lower, eyes on India election, Israel-Iran tensions
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Lallalit Srijandorn
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19 Apr @ 03:53 (GMT+0)

USD/INR drifts lower, eyes on India election, Israel-Iran tensions

  • Indian Rupee gathers strength on Friday despite geopolitical tension risks, renewed USD demand. 
  • The fear of a wider conflict between Israel and Iran might cap the INR’s upside.
  • Investors will focus on the India general election 2024 and RBI Monetary Policy Committee (MPC) Meeting Minutes, due on Friday.

Indian Rupee (INR) rebounds on Friday despite geopolitical fears and foreign fund outflows. However, the escalating tension between Israel and Iran heightens concerns about a wider conflict in the Middle East, triggering the fear of an oil supply disruption. Higher oil prices hurt the INR, as India is the third-largest consumer and importer of crude oil. Furthermore, the higher demand for the US dollar (USD) on safe-haven appeal might lift the pair. 

On the other hand, the USD/INR’s potential upside is limited as the Reserve Bank of India (RBI) is likely to intervene in the foreign exchange (FX) market to prevent the volatility of local currency. Investors will monitor the India general election 2024, as more than 1.4 billion people will begin to vote on Friday. Also, the RBI Monetary Policy Committee (MPC) Meeting Minutes will be released later in the day. On the USD’s front, Chicago Fed Austan Goolsbee is set to speak. 

Daily Digest Market Movers: The Indian Rupee remains firm as India election begins 

  • Trimming trade deficit, expectations of USD inflows in debt markets, and strong growth momentum have been supportive for the INR,” said Dilip Parmar, Research Analyst, HDFC Securities.
  • Israeli missiles attacked a site target in Iran, ABC News said late Thursday, citing a US source, while Iranian state media claimed an explosion in the country's center days after Iran carried out a retaliatory drone strike on Israel.
  • The International Monetary Fund (IMF) raised India’s GDP growth forecast for 2024–25 to 6.8% in its update to the World Economic Outlook (WEO). 
  • The US Initial Jobless Claims for the week ending April 13 increased below market consensus, rising by 212,000 from the previous weekly gain of 212K (revised from 211K). 
  • The Philadelphia Fed Manufacturing Index jumped to 15.5 in April from 3.2 in March, beating the estimation of 1.5. The US Existing Home Sales dropped by 4.3% MoM to 4.19 million from 4.38 million, worse than the anticipated 4.2 million.
  • Atlanta Fed President Raphael Bostic said US inflation is expected to return to the 2% target at a slower pace than many had anticipated, adding that he’s comfortable being patient and that rate cuts are likely by year-end. 
  • New York Fed President John Williams said that he doesn't feel an urgency to cut rates and that monetary policy is in a good place.   

Technical analysis: USD/INR maintains a bullish outlook 

The Indian Rupee trades stronger on the day. USD/INR keeps the bullish stance unchanged as the pair is above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The upward momentum is confirmed by the 14-day Relative Strength Index (RSI), which hovers around 65.00, suggesting that support zones are more likely to hold than to break.

The first upside barrier of the pair will emerge near an all-time high of 83.72. A decisive break above this level will pave the way to the 84.00 psychological round figure. On the other hand, a low of April 18 at 83.50 acts as an initial support level, followed by a low of April 12 at 83.30. A downside break below the 100-day EMA at 83.12 might spark a sharp decline. 

US Dollar price in the last 7 days

The table below shows the percentage change of US Dollar (USD) against listed major currencies in the last 7 days. US Dollar was the weakest against the Swiss Franc.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   0.84% 1.08% 0.69% 2.10% 0.78% 2.01% -0.10%
EUR -0.85%   0.25% -0.15% 1.28% -0.06% 1.13% -0.95%
GBP -1.09% -0.24%   -0.40% 1.03% -0.30% 0.93% -1.20%
CAD -0.70% 0.15% 0.42%   1.42% 0.09% 1.32% -0.80%
AUD -2.15% -1.29% -1.04% -1.44%   -1.35% -0.11% -2.26%
JPY -0.78% 0.05% 0.30% -0.09% 1.32%   1.22% -0.89%
NZD -2.04% -1.18% -0.93% -1.34% 0.11% -1.24%   -2.14%
CHF 0.10% 0.95% 1.19% 0.80% 2.20% 0.89% 2.10%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

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.