- The Indian Rupee broadly underperforms the US Dollar as the US threatens 25% tariffs and a penalty on imports from India.
- Traders pare Fed dovish bets as Powell warns of inflation risks.
- Investors await the US ISM PMI data for July.
The Indian Rupee (INR) retraces from its over five-month low against the US Dollar (USD) during mid-trading hours on Thursday. The USD/INR corrects slightly to near 87.50 from 88.80 as the US Dollar’s rally hits a pause.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls to near 99.50. Still, the United States (US) currency is close to its fresh two-month high of around 99.80 posted on Wednesday.
However, the outlook of the pair remains upbeat as US President Donald Trump has threatened 25% tariffs on imports from India, along with an unspecified penalty for buying Oil and military equipment from Russia.
On Wednesday, US President Trump dictated the tariff rate for India through a tweet on Truth.Social, which will become effective from August 1. While describing India as a friend, Trump criticized the Asian giant for buying defence equipment and energy products from Russia amid its ongoing war with Ukraine, and for imposing the highest tariffs on the US among its key trading partners.
India have always bought a vast majority of their military equipment from Russia, and are Russia’s largest buyer of ENERGY, at a time when everyone wants Russia to stop. India will therefore be paying a tariff of 25%, plus a penalty for the above, starting on August 1”, Trump wrote.
Meanwhile, the Indian government has responded that the administration will take all steps necessary to “secure our national interest” while remaining committed to “concluding a fair, balanced and mutually beneficial bilateral trade agreement”, BBC News reported.
The impact of Trump’s tariffs on imports from India is also visible on Indian equity markets, which had already been facing the wrath of consistent selling by Foreign Institutional Investors (FIIs). In July, FIIs have sold Rs. 42,077.77 crores worth of shares. Moderate quarterly earnings growth from India Inc. and global trade uncertainty remained key drivers behind weakness in Indian markets.
Daily digest market movers: Indian Rupee finds cushion against US Dollar
- The Indian Rupee remains broadly weak against the US Dollar as traders have pared bets supporting interest rate cuts by the Federal Reserve (Fed) in the policy meeting in September. According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September meeting has diminished to 43.2% from 63.3% seen on Tuesday.
- Traders pare Fed dovish bets as Fed Chair Jerome Powell guided that the current interest rate stance is “appropriate” to guard against “upside inflation risks” in the press conference on Wednesday, after supporting leaving borrowing rates in the current range of 4.25%-4.50%.
- Another reason behind the strength in the US Dollar is the upbeat preliminary Q2 Gross Domestic Product (GDP) and ADP Employment Change data for July. The US Bureau of Economic Analysis (BEA) showed on Wednesday that the economy grew at a robust pace of 3% on an annualized basis, compared to estimates of 2.4%. In the first quarter of the year, the US GDP declined by 0.5%.
- Meanwhile, the ADP reported that the private sector added 104K fresh workers, significantly higher than the estimates of 78K. In June, the labor force was reduced by 23K employees.
- Going forward, investors will focus on the US Nonfarm Payrolls (NFP), and the ISM Manufacturing PMI data for July, which will be published on Friday. The employment data will influence market expectations for the Fed’s monetary policy outlook.
- On the global front, Washington has closed a deal with South Korea at a 15% tariff rate.
Technical Analysis: USD/INR eyes more upside above 88.00
USD/INR trades close to a fresh five-month high of around 87.80 on Thursday. The pair trades firmly as the 20-day Exponential Moving Average (EMA) slopes higher to near 86.63, indicating a strong uptrend.
The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting a strong bullish momentum.
Looking down, the 20-day EMA will act as key support for the major. On the upside, the February 10 high around 88.15 will be a critical hurdle for the pair.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
