Created
: 2025.08.04
2025.08.04 13:44
The Indian Rupee (INR) resumes its downside journey against the US Dollar (USD) at the start of the week. The USD/INR pair attracts bids near 87.28 after a two-day correction as the Indian currency faces significant pressure due to multiple headwinds such as persistent outflow of foreign currency from Indian capital markets, US-India trade tensions, and uncertainty surrounding the Reserve Bank of India's (RBI) monetary policy announcement on Wednesday.
Foreign Institutional Investors (FIIs) have started the month by selling Rs. 3,366.60 crores worth of Indian equities. In July, foreign investors sold equity shares worth Rs. 47,666.68 crores, which was than double their cumulative buying in the last four months.
Last week, US President Trump announced a 25% tariff with an unspecified penalty for buying Oil from Russia, on imports from India. The announcement has increased uncertainty over the outlook of Indian companies, which export a significant amount of their output to the US. Additionally, this has also diminished the competitiveness of Indian products in the global market.
Meanwhile, investors await the announcement of the interest rate decision by the RBI on Wednesday. The RBI is expected to leave the key Repo Rate steady at 5.5%, but will likely guide a dovish interest rate outlook amid easing price pressures and trade tensions between the US and India. According to analysts at Nomura, the RBI will cut interest rates by 25 basis points (bps) in both October and December policy meetings.
The USD/INR pair rebounds after finding buying interest near 87.28 in the opening session on Monday. The pair bounces back as a rising 20-day Exponential Moving Average (EMA) around 86.70 indicates that the near-term trend remains upbeat.
The 14-day Relative Strength Index (RSI) oscillates inside 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.
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.
Created
: 2025.08.04
Last updated
: 2025.08.04
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