USD/INR rallies as Trump's tariff plans boost US Dollar

• The Indian Rupee weakens in Tuesday’s early European session.
• The INR is facing some selling pressure as Trump's tariff promise boosts the USD. 
• The FOMC Minutes will be the highlight on Tuesday. 

The Indian Rupee (INR) attracts some sellers on Tuesday after reaching its strongest level in over two weeks. The renewed US Dollar (USD) demand driven by strong US economic data, escalating tensions in the Russia-Ukraine conflict and US President-elect Donald Trump’s plan on new tariffs exert some selling on the local currency. 

However, inflows from MSCI's index rebalancing, declining US bond yields and lower crude oil prices could lift the INR in the near term. Investors will monitor the FOMC Minutes, which are due later on Tuesday. Also, the US Conference Board’s Consumer Confidence, New Home Sales, the Richmond Fed Manufacturing Index and the Dallas Fed Services Index will be released. 

Indian Rupee remains vulnerable despite inflows from MSCI's index rebalancing  

• Indian equities are estimated to see passive inflows of about $2.5 billion on account of the rebalancing of MSCI's equity indexes, according to estimates by Nuvama Alternative & Quantitative Research.  
• “The dollar-rupee pair is anticipated to trade within a defined range in the medium term, with support at 83.80 and resistance around 84.50. The overall bias, however, tilts toward the downside,” said Amit Pabari, managing director at CR Forex.
• Chicago Fed President Austan Goolsbee said on Monday that he foresees the US central bank continuing to lower rates toward a stance that neither restricts nor promotes economic activity. 
• Minneapolis Fed President Neel Kashkari noted that it is still appropriate to consider another interest-rate cut at the Fed’s December meeting. 
• Traders pared back their expectations for an interest rate cut in December. Futures traders are now pricing in 55.9% odds that the Fed will cut rates by a quarter point, down from around 69.5% a month ago, according to the CME FedWatch Tool. 

USD/INR’s longer-term constructive bias is under pressure

The Indian Rupee weakens on the day. The USD/INR maintains the bullish outlook above the key 100-day Exponential Moving Average (EMA) on the daily chart, even though the price has broken below an ascending trend channel. The 14-day Relative Strength Index stands above the midline near 54.60, supporting the buyers in the near term. 

The all-time high and the upper boundary of the trend channel of 84.52 appears to be a tough nut to crack for the bulls. A decisive break above this level could pave the way to the 85.00 psychological level.

On the flip side, the potential support level emerges in the 84.00-83.90 zone, representing the round mark and the 100-day EMA. A breach of the mentioned level could expose 83.65, the low of August 1. 

Indian economy FAQs

How does the Indian economy impact the Indian Rupee?

The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.

What is the impact of Oil prices on the Rupee?

India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.

How does inflation in India impact the Rupee?

Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.

How does seasonal US Dollar demand from importers and banks impact the Rupee?

India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.

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