The Indian Rupee (INR) has traded on the weaker side on Thursday as the USD experiences a modest rebound. The Reserve Bank of India’s (RBI) monthly bulletin has emphasized a strong warning on inflation, stating that if headline retail inflation is not brought down to the medium-term target of 4%, it could impact growth. This article explores the factors contributing to the Indian Rupee’s weakness and examines the potential impact on the currency.
Indian headline retail inflation rate rose to 5.55% in November, worse than market expectations. The RBI’s latest estimations project that Consumer Price Index (CPI) inflation will average 4% in July-September 2024. RBI governor Shaktikanta Das emphasizes the need for sustained inflation reduction, stating that reaching 4% should not be a one-off event. These inflation concerns have put pressure on the Indian Rupee, as investors worry about the impact on economic growth.
Investor focus will also shift to the US Gross Domestic Product (GDP) for Q3, which is expected to remain steady at 5.2%. Additionally, November’s Core Personal Consumption Expenditures Price Index (PCE) will be closely monitored. It is estimated to grow 0.2% MoM and 3.3% YoY. These economic indicators will influence market sentiment and potentially affect the USD/INR exchange rate.
India’s foreign exchange reserves stood at $606.9 billion on December 8, 2023, making it the fourth-highest among major reserve-holding countries. This substantial reserve accumulation provides some stability to the Indian Rupee. Furthermore, India’s total outstanding bonds traded in the market have surged to $2.47 trillion, indicating investor confidence in the country’s debt market.
The International Monetary Fund (IMF) has recently reclassified India’s exchange rate regime from floating to a stabilized arrangement. This change reflects the RBI’s intervention in foreign exchange markets to maintain stability. The Indian Rupee is highly sensitive to external factors such as the price of crude oil, the value of the US Dollar, and the level of foreign investment. These factors, along with interest rates set by the RBI, significantly influence the exchange rate.
Several macroeconomic factors impact the value of the Indian Rupee, including inflation, interest rates, economic growth rate (GDP), the balance of trade, and foreign investment inflows. Higher interest rates, particularly real rates, strengthen the Rupee. A risk-on environment and inflows of Foreign Direct and Indirect Investment (FDI and FII) also benefit the currency. However, higher inflation can devalue the Rupee and increase the cost of exports, negatively impacting the currency.
From a technical perspective, the USD/INR pair has remained within the 82.80-83.40 range since September. While the pair is currently trading above the key 100-day Exponential Moving Average (EMA), the 14-day Relative Strength Index (RSI) is below the 50.0 midpoint. This suggests potential challenges for the currency pair. A break above the upper boundary of the trading range at 83.40 could lead to further resistance levels at the year-to-date high of 83.47 and the psychological level of 84.00. On the downside, support levels are seen at the psychological mark of 83.00, followed by 82.80 and 82.60.
The Indian Rupee continues to weaken amid concerns about inflation and the potential impact on economic growth. The RBI’s emphasis on sustained inflation reduction highlights the importance of maintaining price stability. External factors, such as the price of crude oil and the value of the US Dollar, also play a significant role in determining the exchange rate. Investors will closely monitor the US GDP and Core PCE Index for further market direction. While technical analysis suggests potential challenges for the USD/INR pair, support and resistance levels need to be closely watched.