- The Indian Rupee weakens to near a record low in Thursday’s early European session.
- The weakening in the Chinese Yuan, firmer USD and dovish expectations following Malhotra’s appointment weigh on the INR.
- The Indian CPI inflation and US PPI data will be the highlights on Thursday.
The Indian Rupee (INR) loses ground to near an all-time low on Thursday. A sharp decline in the Chinese Yuan and increased US Dollar (USD) from importers and foreign banks might drag the local currency lower. Furthermore, the appointment of career bureaucrat Sanjay Malhotra as the next governor of the Reserve Bank of India (RBI) prompted traders to raise their expectations on the interest rate cuts, which could exert some selling pressure on the INR.
Nonetheless, the downside for the Indian Rupee might be limited as the RBI might step in to limit further depreciation. The Indian central bank often intervenes by selling USD to prevent steep INR weakness.
Traders will keep an eye on the US November Producer Price Index (PPI) and weekly Initial Jobless Claims, which are due later on Thursday. On the Indian docket, the CPI inflation, Industrial Output and Manufacturing Output data will be released on Thursday.
Indian Rupee remains weak amid multiple headwinds
- Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Wednesday, offloading shares worth Rs 1,012.24 crore, according to exchange data.
- Indian shares held steady on Thursday as a rise in IT stocks due to the near-certainty of a US rate cut next week was offset by a retreat in almost all other sectors on caution ahead of the Indian CPI inflation data. The NSE Nifty 50 was flattish at 24,638 points as of 10:06 a.m. IST, while the BSE Sensex was little changed at 81,566.06.
- Indian Chief Economic Advisor (CEA) Anantha Nageswaran said on Thursday that the Indian economy will be able to achieve a 6.5 -7% growth rate in the FY 25
- Nageswaran highlighted that sustaining the growth rate remains a priority.
- India’s GDP growth is estimated to rise to 7% in FY26, led by a capex cycle reboot, tailwinds from back-ended fiscal spending in FY25, a cut in the cash reserve ratio (CRR), and likely further macro-prudential easing, which could help revive credit growth, according to Axis Bank.
- Economists at Capital Economics anticipate a 25 bps cut in India’s repo rate at Malhotra’s first MPC meeting in February, if not in an unscheduled meeting earlier. Economists estimated that the cut would come in April under Das’ leadership.
- The US Consumer Price Index (CPI) inflation rose to 2.7% YoY in November from 2.6% in October, the US Bureau of Labor Statistics showed on Wednesday. This reading was in line with the market consensus.
- The core CPI, excluding volatile food and energy prices, climbed 3.3% YoY in November, compared to 3.3% during the same period. On a monthly basis, the headline CPI increased 0.3% MoM, while the core CPI rose 0.3% MoM in November.
- Fed funds futures are pricing in a roughly 95% chance that the US central bank lowers rates in the December meeting, according to CME’s FedWatch Tool.
USD/INR keeps the bullish vibe in the longer term
The Indian Rupee softens on the day. The USD/INR pair paints a positive picture on the daily chart as the pair is well-supported above the key 100-day Exponential Moving Average (EMA). Nonetheless, the 14-day Relative Strength Index (RSI) is located above the midline near 67.70, suggesting the support level is more likely to hold than to break.
The potential resistance level emerges at 85.00, representing the ascending trend channel and the psychological level. Extended gains above this level could see a rally to 85.50.
On the other hand, the lower boundary of the trend channel at 84.70 acts as an initial support level for USD/INR. Sustained trading below the mentioned level could pave the way to 84.22, the low of November 25, followed by 84.10, the 100-day EMA.
Indian economy FAQs
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.
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.
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.
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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