- The Indian Rupee softens in Friday’s early European session.
- More cautious stance from the Fed weigh on the INR, but lower crude oil prices and RBI’s intervention might cap its upside.
- The US Core PCE Price Index report will be the highlight on Friday.
The Indian Rupee (INR) edges lower on Friday after depreciating to an all-time low of 85.12 in the previous session. A hawkish rate cut from the US Federal Reserve (Fed) sparks the US Dollar (USD) broadly and exerts some selling pressure on emerging market currencies, including the INR.
However, the decline in crude oil prices might help limit the local currency’s losses as India is the world’s third-largest oil consumer. Additionally, the Reserve Bank of India (RBI) could intervene in the market to prevent excess volatility. Looking ahead, traders will focus on the US Core Personal Consumption Expenditures (PCE) Price Index data, which is due later on Friday. Also, the US Michigan Consumer Sentiment Index for December will be released.
Indian Rupee loses traction amid multiple challenges
- “We expect the rupee to trade with a negative bias on global equities following a hawkish Fed and a strong dollar. Concerns over a slowdown in the economy may further weigh on the rupee,” said Anuj Choudhary Research Analyst at Mirae Asset Sharekhan.
- India’s foreign exchange reserves fell in nine out of the past 10 weeks, hitting a multi-month low. The reserves had been falling ever since reserves touched an all-time high of USD 704.89 billion in September, and now last week the forex stood at USD 654.857 billion, according to the RBI data.
- The US Gross Domestic Product (GDP) grew at a 3.1% annualized rate in the third quarter (GDP), compared to a previous projection of 2.8%, the third estimate of the figures from the Bureau of Economic Analysis showed Thursday.
- The weekly Initial Jobless Claims in the US declined to 220,000 in the week ending December 14, compared to the previous week’s print of 242,000, and came in below the market consensus of 230,000.
USD/INR maintains a strong uptrend in the longer term
The Indian Rupee trades softer on the day. The constructive outlook of the USD/INR pair remains intact on the daily chart as the pair holds above the key 100-day Exponential Moving Average (EMA). Nonetheless, the 14-day Relative Strength Index (RSI) is over the midline near 70.95, suggesting an overbought condition. This means that additional consolidation should not be ruled out before positioning for any short-term USD/INR appreciation.
The ascending trend channel at 85.20 acts as an immediate resistance level for USD/INR. A decisive break above this level could see a rally to 85.50.
On the flip side, the first downside target is seen at 84.86, the lower boundary of the trend channel. A breach of this level could pave the way to 84.16, the 100-day EMA.
RBI FAQs
The role of the Reserve Bank of India (RBI), in its own words, is “..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.
The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.
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