- The Indian Rupee softens on Wednesday’s Asian session.
- Geopolitical risks and Trump’s tariff threats weigh on the INR, but persistent weakness in USD might help limit its losses.
- The Fed rate decision will take center stage later on Wednesday.
The Indian Rupee (INR) loses ground on Wednesday after reaching over a three-week high in the previous session. The escalating geopolitical tensions in the Middle East weigh on the Indian currency. The upcoming reciprocal tariffs from US President Donald Trump on April 2 could also exert some selling pressure on the INR in the near term.
However, a broadly weaker Greenback and an uptick in exporter US Dollar (USD) sales could provide some support to the local currency. Additionally, India’s latest current account data, which showed a surplus in February, might contribute to the INR’s upside.
All eyes will be on the Federal Reserve (Fed) interest rate decision on Wednesday, which is expected to hold interest rates steady. Investors will closely monitor the Press Conference and Summary of Economic Projections (SEP), or ‘dot-plot’ as it might offer some hints about views on the economy and possibly the future path for interest rates.
Indian Rupee softens ahead of Fed rate decision
- India’s Wholesale Price Index (WPI) inflation rose to 2.38% in February from 2.31% in January, the Ministry of Commerce and Industry reported on Monday. This figure came in hotter than the estimation of 2.36%.
- A White House official said late Tuesday that reciprocal tariffs still intended to take effect from April 2
- US Industrial Production rose by 0.7% MoM in February, versus 0.3% prior (revised from 0.5%), according to the Federal Reserve on Tuesday. This reading came in better than the market expectation for a growth of 0.2%.
- Building permits in the US fell by 1.2% to a seasonally adjusted annualized rate of 1.456 million in February, slightly higher than market expectations of 1.450 million. It was the biggest drop in five months.
- US Housing Starts jumps by 11.2% to an annual rate of 1.501 million in February after plunging by 11.5% to a revised rate of 1.350 million in January.
- The odds of a rate cut at the May meeting have risen to 25% from 18% a month ago, according to the CME FedWatch Tool.
USD/INR remains constructive in the longer term
The Indian Rupee weakens on the day. In the longer term, the USD/INR pair keeps the bullish vibe on the daily chart, with the price holding above the key 100-day Exponential Moving Average (EMA). However, in the near term, the pair has broken out of a symmetrical triangle, while the 14-day Relative Strength Index (RSI) stands below the midline near 42.60, suggesting that further downside cannot be ruled out.
The key resistance level for USD/INR is seen near the 87.00 psychological level. Consistent trading above this level could pave the way to 87.38, the high of March 11, en route to 87.53, the high of February 28.
On the flip side, the initial support level is located at 86.48, the low of March 18. A breach of the mentioned level could open the door for a move toward 86.14, the low of January 27, followed by 85.60, the low of January 6.
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.
