USD/INR refreshes two-week low amid uncertainty over Fed’s autonomy, tariff deadline
- The Indian Rupee strengthens against the US Dollar as investors reassess the Greenback’s safe-haven appeal.
- Trump aims to select Powell’s successor as he has endorsed steady interest rates.
- The Indian economy is anticipated to grow by 6.4% this year.
The Indian Rupee (INR) posts a fresh two-week high against the US Dollar (USD) at open on Friday. The USD/INR slides to near 85.50 as the US Dollar (USD) continues to underperform, following United States (US) President Donald Trump’s attack on the Federal Reserve’s (Fed) independence, which has uplifted dovish bets.
During the Asian session, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of currencies, struggled to hold the three-and-a-half year low around 97.00 posted on Thursday.
After Fed Chair Jerome Powell’s testimony in which he signaled that the consideration of interest rate cuts at a time when the central bank is struggling to gauge the scope of the sensitivity of tariffs to inflation and economy is inappropriate, US President Trump called him “terrible” for endorsing steady interest rates and stated that he has three or four names for his replacement.
Such a move led investors to reassess the US Dollar’s exceptionalism, assuming that Fed’s future decisions will be motivated by political agenda, and not fundamental economic risks.
Analysts at Societe Generale said, “The market is pricing in President Trump appointing someone who at least at first sight appears more sympathetic to his cause.”
This also led traders to raise bets supporting the Fed to bring interest rates down in the July policy meeting. According to the CME FedWatch tool, the probability of the Fed to cut interest rates in the July has increased to 20.7% from 12.5% seen a week ago.
Daily digest market movers: Indian Rupee gains on higher foreign inflows, sluggish Oil price
- On the domestic front, the Indian Rupee gains against its major peers on Friday due to strong foreign inflows and sluggish Oil price. Foreign Institutional Investors (FIIs) bought Indian equities worth of Rs. 12,594.38 crores on Thursday, the highest figure seen this month. This has also led Indian indices to their highest levels year-to-date. At open, Nifty50 is up 0.15% to near 25,600 and Sensex30 moves higher around 84,000.
- A sluggish performance by the Oil price near its two-week low after the announcement of the Israel-Iran ceasefire has strengthened currencies of those economies that fulfil their energy needs through import of Oil, such as the Indian Rupee.
- Meanwhile, economists have projected a slightly slower Gross Domestic Product (GDP) growth for the current financial year ending in March at 6.4%, compared to 6.5% growth seen last year, according to a poll from Reuters. Economists have projected a slower growth despite the Reserve Bank of India (RBI) having front-loaded interest rate cuts.
- This would be the modest GDP growth since the 2020-2021 period, which was impacted by the pandemic. In spite of a mild slowdown, India will remain the world’s fastest-growing major economy due to strong government spending.
- Going forward, the next trigger for the Indian Rupee will be trade talks between Washington and New Delhi ahead of the deadline of 90-day pause on the imposition of reciprocal tariffs, which is July 9. The Indian economy was expected to be the first country to secure a bilateral deal with the US after the announcement of reciprocal tariffs. However, the deal announcement was deferred due to India-Pakistan conflict in mid-May.
- In the US region, investors await the Personal Consumption Expenditure Price Index (PCE) data for May, which will be published on Friday. The Fed’s preferred inflation gauge is expected to show that inflationary pressures grew at a faster pace on year.
Technical Analysis: USD/INR skids below 20-day EMA
The USD/INR pair slides below the 20 and 50-day Exponential Moving Averages (EMAs), which trade around 85.86 and 85.72, respectively, suggesting that the near-term has turned bearish.
The 14-day Relative Strength Index (RSI) slides below 50.00 after remaining above 60.00 in the past few trading days, indicating a strong bearish reversal.
Looking down, the 200-day EMA around 85.35 will act as key support for the major. On the upside, Wednesday’s high of 86.13 will be a critical hurdle for the pair.
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.