- The Indian Rupee strengthens in Wednesday’s early European session.
- The likely RBI intervention and softer US Dollar underpin the INR.
- The Indian and US CPI inflation reports will take center stage later on Wednesday.
The Indian Rupee (INR) rebounds on Wednesday. The potential foreign exchange intervention from the Reserve Bank of India (RBI) and strong Asian currencies, especially the offshore Chinese Yuan provide some support to the Indian currency.
Nonetheless, the unabated outflows of foreign funds into Indian equities could exert some selling pressure on the local currency. Foreign investors have withdrawn almost $15 billion from Indian shares so far this year, putting outflows on track to surpass the record $17 billion registered in 2022.
Additionally, a recovery in crude oil prices could undermine the Indian Rupee. It’s worth noting that India is the world’s third-largest oil consumer and higher crude oil prices tend to have a negative impact on the INR value. Looking ahead, traders will closely monitor the Indian and US Consumer Price Index (CPI) inflation reports for February, which are due later on Wednesday.
Indian Rupee gains momentum amid a weaker US Dollar
- RBI was the net seller of over $36 billion between June and December to support the Indian Rupee, according to government data on Tuesday.
- Trump reversed his decision to double tariffs on Canadian steel and aluminum to 50%, which he announced late Tuesday.
- The US JOLTS report showed that job openings rose to 7.740 million in January, up from 7.508 million, surpassing expectations of 7.63 million.
- Financial markets have priced in 75 basis points (bps) of rate cuts from the Fed this year, LSEG data show, with a rate cut fully priced in for June.
USD/INR maintains a constructive outlook despite consolidation in the near term
The Indian Rupee trades on a stronger note on the day. The bullish trend of the USD/INR pair remains in play as the price is above the key 100-day Exponential Moving Average (EMA) on the daily chart. The upward momentum is reinforced by the 14-day Relative Strength Index (RSI), which is located above the midline near 56.15.
The immediate resistance level is seen at 87.53, the high of February 28. Sustained buying above this level could pave the way to an all-time high near 88.00, en route to 88.50.
On the flip side, the low of March 6 at 86.86 acts as the first downside target for the pair. Any follow-through selling could open the door for a deeper drop toward 86.48, the low of February 21, followed by 86.14, the low of January 27.
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.
