USD/INR opens gap up as Trump threatens higher tariffs on India again
- The Indian Rupee opens sharply lower against the US Dollar as Trump threatens higher tariffs on imports from India again.
- India responded strongly to Trump's tariff threats, stating that the nation will take all measures to protect its national interest.
- Investors expect the RBI to hold interest rates steady on Wednesday.
The Indian Rupee (INR) opens on a gap-down note against the US Dollar (USD) on Tuesday, sending the USD/INR pair to its all-time high of around 88.25. The Indian currency faces intense selling pressure as trade tensions between India and the United States (US) have escalated.
On Monday, US President Donald Trump threatened, through a post on Truth.Social, India again with higher tariffs for buying Oil from Russia, a move that has been interpreted as funding Moscow to continue the war with Ukraine.
"India is not only buying massive amounts of Russian Oil, they are then, for much of the Oil purchased, selling it on the Open Market for big profits. They don’t care how many people in Ukraine are being killed by the Russian War Machine," Trump wrote. He further added, "Because of this, I will be substantially raising the Tariff paid by India to the USA.”
Last week, US President Trump announced 25% tariffs on imports from India along with an unspecified duty for buying Russian Oil, citing that their tariffs are too high.
In response to Trump’s tariff threats, India’s Ministry of External Affairs (MEA) stated that the targeting of India is “unjustified and unreasonable”, Reuters reported. To support their response, the agency released a six-point statement sheet on Monday, which also stated that India will take all necessary measures to safeguard its “national interests and economic security”.
According to India’s response sheet, Washington praised New Delhi for buying Russian Oil as the act brought stability in the global energy market.
Daily digest market movers: Indian Rupee weakens against US Dollar due to multiple headwinds
- Apart from US-India trade tensions, the continuous outflow of foreign funds from Indian equity markets, and uncertainty surrounding the Reserve Bank of India’s (RBI) monetary policy announcement on Wednesday have also weighed heavily on the Indian Rupee.
- In two trading sessions of August, Foreign Institutional Investors (FIIs) have sold Rs. 5,932.91 crores worth of Indian equity cumulatively. The outflow of significant foreign funds from an economy often leads to depreciation of its currency.
- On Wednesday, the RBI is almost certain to leave its Repo Rate unchanged at 5.5%. In June, the Indian central bank surprisingly reduced the Repo Rate by 50 basis points (bps), citing that they have front-loaded interest rate cuts to boost economic growth. As the RBI is expected to maintain the status quo, investors will pay close attention to the monetary policy guidance for the remainder of the year.
- Cooling inflationary pressures, US-India trade tensions, and the upcoming festive season point to the need for further monetary policy expansion in the near term. In June, the Retail inflation grew moderately by 2.1% on year, the lowest level seen in almost six years.
- In the US, growing expectations that the Federal Reserve (Fed) could resume its monetary expansion cycle in the September meeting, which it paused in December, have capped the upside in the US Dollar.
- According to the CME FedWatch tool, the probability of the Fed cutting interest rates in the September meeting has increased to 92.2% from 41.2% seen on Thursday, a day before the release of the Nonfarm Payroll (NFP) data for July.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles near Friday’s low around 98.60.
- In Tuesday’s session, investors will focus on the US revised S&P Global and ISM Services Purchasing Managers’ Index (PMI) data for July, which will be published during North American trading hours.
Technical Analysis: USD/INR reclaims all-time highs around 88.25
USD/INR revisits all-time highs around 88.25 at open on Tuesday. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 86.92.
The 14-day Relative Strength Index (RSI) oscillates within the 60.00-80.00 range, suggesting 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.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.