The Indian Rupee (INR) gives back early gains against the US Dollar (USD) during afternoon trading hours in India on Friday. The USD/INR pair rebounds to around 90.65 after correcting in the last two days, as the US dollar rebounds to a weekly high despite an unexpected slowdown in November US inflation data.
The pair rebounded this week from record highs of 91.55 due to the Reserve Bank of India’s (RBI) intervention in the spot and non-deliverable (NDF) markets to support a one-way depreciation of the Indian rupee.
At the time of writing, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is trading 0.25% higher near 98.65.
US Consumer Price Index data on Thursday showed that headline inflation fell to 2.7% year-on-year from 3% in October. Economists expect inflation data to come in higher at 3.1%. The so-called core reading, which excludes volatile food and energy items, fell to 2.6% from the previous estimate and reading of 3%.
Initially, the US dollar reacted negatively to the weak inflation data, but has since recovered its losses as the data did not materially impact dovish expectations for the Federal Reserve’s monetary policy meeting in January. According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 25 basis points to 3.25%-3.50% at the January meeting is 25.5%, marginally higher than the 24.4% recorded on Wednesday.
Chicago President Austan Goolsbee welcomed the weak inflation results in his interview with Fox Business on Thursday, noting that “there’s a lot to like” in the data. Goolsbee noted that there could be additional interest rate cuts next year if inflation remains on track toward the 2% target.
Daily summary of market drivers: The Indian rupee lacks supporting fundamentals
- It was expected that the recent recovery of the Indian rupee would not last long due to the absence of supporting fundamentals.
- So far this year, the Indian rupee has depreciated by more than 6% against the US dollar due to strong demand for the US dollar by Indian importers and continued inflow of foreign funds from the Indian stock market amid the absence of an announcement of a trade deal between the US and India.
- Currently, Washington imposes 50% tariffs on imports from New Delhi, which includes a punitive 25% import duty on oil purchases from Russia. This is one of the highest tariffs imposed by Washington on its trading partners.
- This month, foreign institutional investors (FIIs) offloaded stake worth Rs. 21,688.26 crore in Indian stock market. However, some type of buying has been observed in the last two trading days. FIIs have been shown to be net buyers of the rupee. The shares were valued at Rs 1,767.49 crore collectively on Wednesday and Thursday. Nominal buying interest in FII activity is unlikely to provide a sustained boost to risk sentiment, as the overall mood remains cautious amid the US-India trade stalemate.
- Going forward, the next major catalyst for USD/INR will be the White House announcement of Fed Chairman Jerome Powell’s successor. On Thursday, US President Donald Trump interviewed Federal Reserve Governor Christopher Waller for the position of Chairman of the Board of Directors, and praised him and described him as “wonderful” while responding to reporters. Trump also called Gov. Michelle Bowman “wonderful” when asked about his views on her as Powell’s successor.
- Last week, US President Trump said he had narrowed his picks for Fed chair to two Kevins, namely White House economic advisor Kevin Hassett and former Fed Chairman Kevin Warsh.
Technical Analysis: The USD/INR pair is witnessing further downside trend below the 90.00 level
The USD/INR pair recovers from its early losses and settles around the 90.6405 area on Friday. The price is holding above the bullish 20-day exponential moving average (EMA) at 90.2360, maintaining a bullish bias and indicating shallow pullbacks.
The 14-day RSI seeks gains near the 60 level, keeping hopes of a new upward move alive.
A close north of the moving average will keep the way open to revisit the all-time high at 91.50. The price will enter uncharted territory if it breaks above this level. Conversely, a break below the 20-day EMA could trigger a broader pullback towards the December low of 89.52.
(The technical analysis for this story was written with the help of an artificial intelligence tool.)
Frequently asked questions about inflation
Inflation measures the rise in the prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (MoM) and yearly (YoY) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the number that economists focus on and is the level targeted by central banks, which are tasked with keeping inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a monthly (MoM) and yearly (YoY) basis. The core CPI is the number targeted by central banks because it excludes volatile food and fuel inputs. When the core CPI rises above 2%, it typically causes interest rates to rise and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation falls.
Although it may seem counterintuitive, high inflation in a country causes the value of its currency to rise and vice versa for lower inflation. This is because the central bank will typically raise interest rates to combat rising inflation, which attracts more global capital flows from investors looking for a profitable place to park their money.
Previously, gold was the asset investors turned to during times of high inflation because it maintained its value, and while investors will often continue to buy gold for its safe holdings in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will raise interest rates to combat it. High interest rates are negative for gold because they increase the opportunity cost of holding gold versus interest-bearing assets or putting money in a cash deposit account. On the flip side, lower inflation tends to be positive for gold because it lowers interest rates, making the shiny metal a more viable investment alternative.
