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USD/INR extends upside amid rising US Dollar demand

The Indian Rupee weakens near an all-time low in Thursday’s Asian session.
A stronger USD, lacklustre sentiment in domestic equity markets, and sustained outflow of foreign funds weigh on the INR.
Investors await the Fedspeak on Thursday for a fresh impetus.

The Indian Rupee (INR) declines to near a fresh record low on Thursday. The local currency remains under pressure on the back of a stronger US Dollar (USD) and higher crude oil prices. Slowing economic growth and foreign outflows from stocks also undermine the INR.

On the other hand, the Reserve Bank of India (RBI) is likely to sell the USD to limit the INR’s losses. Investors will keep an eye on the Fedspeak on Thursday for more cues about the US interest rate outlook this year. On Friday, the attention will shift to the US employment data for December, including the Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings.

Indian Rupee faces pressure amid a firmer USD and concerns over India’s slowing economic growth

The Indian Rupee is likely to weaken to 86.8 per dollar this quarter, according to MUFG, while Citigroup Inc. expects it to fall to 86.35. USD/INR fell 0.2% to a new record closing low of 85.8550 on Wednesday.
India’s economic growth rate is estimated to slip to a four-year low of 6.4% in FY25, down from 8.2% in FY24.
The FOMC minutes from the Fed’s December 17-18 meeting showed policymakers agreed inflation was likely to continue slowing this year but also saw a rising risk that price pressures could remain sticky due to the potential effect of Donald Trump’s policies.
The US weekly Initial Jobless Claims for the week ending January 4 declined to 201K from the previous week’s print of 211K, according to the US Department of Labor (DOL) on Wednesday. This reading came in better than the market expectation of 218K.
Fed Governor Christopher Waller said on Wednesday that inflation should continue falling in 2025 and allow the US central bank to further cut interest rates, though at an uncertain pace, per Reuters.

USD/INR maintains its positive tone, but an overbought RSI warrants caution for bulls

The Indian Rupee trades in negative territory on the day. The strong bullish outlook of the USD/INR pair remains intact as the pair is well-supported above the key 100-day Exponential Moving Average (EMA) on the daily timeframe.

Nonetheless, the 14-day Relative Strength Index (RSI) moves beyond the 70.00 mark, warranting some caution for bulls. The overbought condition suggests that further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.

The crucial resistance level for USD/INR emerges at the 85.95-86.00 zone, representing the all-time high and the psychological mark. A decisive break above this level could see a rally to 86.50.

On the flip side, the initial support level for the pair is seen at 85.65, the low of January 7. A breach of the mentioned level could drag the pair lower to the next downside target at 84.51, the 100-day EMA.

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.

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