USD/INR strengthens as India and Pakistan tension escalates
- Indian Rupee softens in Wednesday’s Asian trading hours.
- Heightened tensions between India and Pakistan weigh on the INR.
- Traders await the US ADP Employment Change, PCE inflation and flash Q1 GDP report later on Wednesday.
The Indian Rupee (INR) weakens on Wednesday, pressured by rising geopolitical tensions between India and Pakistan. Many tourist sites in Kashmir have been closed since Tuesday, as traders react to unverified reports of military activity.
Nonetheless, positive domestic markets and a decline in crude oil prices might help limit the INR’s losses. Foreign investors have stepped up buying of Indian stocks over the last week, a reversal from the selling pressure witnessed earlier in the month.
Looking ahead, traders will keep an eye on the US ADP Employment Change, which is due later on Wednesday. Also, the Personal Consumption Expenditures Price Index (PCE) and the preliminary reading of Q1 Gross Domestic Product (GDP) will be published. On Friday, all eyes will be on the US April Nonfarm Payrolls (NFP) report.
Indian Rupee remains weak as tensions between India and Pakistan escalate
- Pakistan’s minister for information and broadcasting said Islamabad has “credible intelligence” that India intends to launch a military strike within the next 24 to 36 hours, per Aljazeera.
- “While sentiment is slightly positive for the rupee given the pick up in portfolio inflows, geopolitical flare-ups remain a risk for the currency”, said Dilip Parmar, a forex research analyst at HDFC Securities.
- Pakistan’s defence minister stated on Monday that a military incursion by neighboring India was imminent in the aftermath of a deadly militant attack on tourists in Kashmir last week, per Reuters.
- US Treasury Secretary Scott Bessent said on Monday that many top trading partners of the US had made 'very good' proposals to avert US tariffs, and one of the first deals to be signed would likely be with India.
- US job openings fell to 7.19 million in March, the lowest since September 2024, compared to a revised 7.48 million in February, according to the US Bureau of Labor Statistics on Tuesday. This figure came in below the market consensus of 7.5 million.
- The US Conference Board’s Consumer Confidence Index declined to 86.0 in April from 93.9 in March (revised from 92.9). This figure registered the lowest level since April 2020.
- The possibility of a rate cut from the US Federal Reserve (Fed) jumped to 56.8% as weaker-than-expected labor and sentiment data increased concerns about economic momentum.
USD/INR sticks to negative bias under the 100-day EMA
The Indian Rupee trades on a weaker note on the day. The bearish bias of the USD/INR remains in place, characterized by the price holding below the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Furthermore, the bearish momentum is reinforced by the 14-day Relative Strength Index (RSI), which is located below the midline near 39.70.
A breach of the lower limit of the descending trend channel of 84.70 could attract selling interest enough to put the pair toward 84.22, the low of November 25, 2024. Extended losses could see a drop to 84.08, the low of November 6, 2024.
On the bright side, the key upside barrier for the pair is seen at 85.78, the 100-day EMA. Sustained trading above the mentioned level could suggest that a major reversal is in the works and pave the way to 86.35, the upper boundary of the trend channel.
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.