The USD/INR pair ended Wednesday’s session with modest gains around 90.55. On Thursday, Indian stock, commodity and currency markets are closed due to municipal elections in Mumbai.
The pair is expected to start Friday’s session cautiously, as the Indian Rupee is expected to attract minor bids due to the sharp correction in oil prices. The price of West Texas Intermediate crude fell sharply to nearly $59.70 after revisiting a three-month high of $62.20, as US President Donald Trump allayed fears of military action in Iran, after assuring that they would stop killing protesters.
Earlier this week, US President Trump threatened to attack the government of Supreme Leader Ayatollah Ali Khamenei for executing protesters amid civil unrest in various cities in Iran. Reduced fears of US military action have allayed fears of supply chain disruption.
Currencies from economies that rely heavily on oil imports to meet their energy needs are under pressure in an environment of rising oil prices.
Overall, the outlook for the Indian rupee is expected to remain fragile amid the absence of an announcement of a US-India trade deal. This week, negotiators from the US and India claimed that the trade talks on Tuesday remained positive, and they are very likely to hold the next meeting in February, which is a favorable scenario for the Indian rupee, but failed to improve foreign investor sentiment towards the Indian stock market.
Foreign institutional investors (FIIs) remained negative on the Indian stock market despite signs of improving hopes for a trade deal between the US and India. On Wednesday, FIIs offloaded their quota worth Rs. 4,781.24 crore, according to data from NSE. So far in January, FIIs have remained net sellers in nine out of 10 trading days, trimming their stake by Rs. 21,706.27 crores.
Meanwhile, the US dollar is trading strongly on expectations that the Federal Reserve will pause its monetary easing campaign at its policy meeting later this month. At the time of writing, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is trading near a monthly high of 99.26.
Frequently asked questions about the Indian Rupee
The Indian Rupee (INR) is one of the currencies most sensitive to external factors. The price of crude oil (the country relies heavily on imported oil), the value of the US dollar – most trade is done in US dollars – and the level of foreign investment are all influencing factors. Direct intervention by the Reserve Bank of India (RBI) in the foreign exchange markets to maintain exchange rate stability, as well as the level of interest rates set by the RBI, are the major factors influencing the rupee.
The Reserve Bank of India (RBI) actively intervenes in the Forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the Reserve Bank of India is trying to keep inflation at its target of 4% 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 low interest rates in order to place their money in countries offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that affect the value of the rupee include inflation, interest rates, economic growth rate, trade balance, and inflows of foreign investment. A higher growth rate can lead to more foreign investments, leading to increased demand for the rupee. A less negative trade balance will eventually lead to a stronger rupee. Higher interest rates, especially real rates (interest rates below inflation) are also positive for the rupee. The risk environment could lead to greater inflows of FDI and indirect FDI (FDI and FII), which also benefits the rupee.
A higher rate of inflation, especially if it is relatively higher than its counterparts in India, is generally negative for the currency because it reflects a decline in the value of the currency through increased supply. Inflation also increases the cost of exports, causing more rupees to be sold to buy foreign imports, which represents a negative value for the rupee. Meanwhile, 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 holds for lower inflation.
