USD/INR gathers strength, all eyes on RBI MPC meeting

USD/INR gathers strength, all eyes on RBI MPC meeting
  • Indian Rupee loses ground on the renewed US Dollar demand.
  • India’s S&P Global Services PMI for November fell to 56.9 vs 58.4 prior, worse than the 58.0 expected.
  • The Reserve Bank of India (RBI) is likely to maintain the repo rate unchanged at 6.5% at its December meeting.

Indian Rupee (INR) edges lower on Wednesday on the firmer US Dollar (USD). According to the “Global Credit Outlook 2024” by S&P, India is projected to be the fastest-growing major economy in the next three years. S&P forecast India’s growth of 7% in the 2026–27 fiscal year. Nevertheless, the critical obstacle lies in determining whether the nation can effectively evolve into the next major global manufacturing hub.

On Tuesday, India’s S&P Global Services Purchasing Managers’ Index (PMI) for November came in at 56.9 from 58.4 in October, below the market consensus of 58.0. The figure registered the slowest pace of growth since November 2022, but the index remained firm above the 50-mark threshold that separates growth from contraction.

The Reserve Bank of India (RBI) will schedule its three-day Monetary Policy Committee (MPC) meeting starting on Wednesday. The markets anticipate the central bank will maintain the status quo on the repo rate, leaving it unchanged at 6.5% due to the upbeat GDP growth and the easing trend of core inflation.

Daily Digest Market Movers: Indian Rupee remains sensitive to global factors and uncertainties

  • Indian markets are sustaining a rally fueled by an improving interest rate outlook in the US, moderate oil price, resilient domestic macroeconomic data, renewed foreign inflows, and growing optimism about policy continuity in 2024 after the state assembly election results.
  • India’s stock market value surpassed $4 trillion for the first time, marking a key milestone for the world’s fifth-biggest equity market.
  • S&P Global India Services PMI declined to 56.9 in November from 58.4 in October, below market expectations of 58.0.
  • The RBI is likely to sell the US Dollar near 83.38–83.39 levels to cap further depreciation in the Indian Rupee, per Reuters.
  • As core CPI inflation moderated to 4.5% YoY and CPI inflation moderated to 4.87% YoY on October 23, analysts anticipate that the RBI will maintain the policy repo rate at its December meeting.
  • RBI Governor Shaktikanata Das said that headline inflation has moderated, but the Indian economy remains sensitive to overlapping food price shocks caused by global factors and adverse weather events.
  • US ISM Services PMI rose to 52.7 in November from 51.8 in the previous reading, better than the market expectation of 52.0.
  • JOLTS Job Openings declined by 617,000 to 8.73M in October, falling to their lowest level since March 2021.
  • Fed futures are now pricing that the Fed is done hiking rates and could start cutting policy rates as soon as March or May.

Technical Analysis: Indian Rupee’s positive outlook remains in place

Indian Rupee trades weaker on the day. The USD/INR pair has traded within a familiar multi-month-old trading band of 82.80–83.40. Technically, the pair’s outlook remains constructive as it holds above the key 100-day Exponential Moving Average (EMA) on the daily chart. This bullish momentum is reinforced by the 14-day Relative Strength Index (RSI), which remains above the 50.0 midpoint, suggesting that the path of least resistance is to the upside.

The USD/INR first resistance level is located at the upper boundary of the trading range of 83.40. A decisive break above 83.40 could pave the way for a recovery toward the year-to-date (YTD) high of 83.47. Further north, the next hurdle will emerge at a psychological round figure of 84.00.

On the downside, the 83.00 psychological mark is the key support level for the pair. A breach of this level could drag prices toward the confluence of the lower limit of the trading range and a low of September 12 at 82.80, followed by a low of August 11 at 82.60.

US Dollar price in the last 7 days

The table below shows the percentage change of US Dollar (USD) against listed major currencies in the last 7 days. US Dollar was the strongest against the Euro.

USD   1.96% 0.85% 0.08% 1.12% 0.09% -0.20% -0.23%
EUR -1.99%   -1.11% -1.92% -0.85% -1.91% -2.21% -2.23%
GBP -0.87% 1.10%   -0.78% 0.26% -0.79% -1.10% -1.10%
CAD -0.08% 1.88% 0.78%   1.05% -0.01% -0.28% -0.32%
AUD -1.14% 0.83% -0.28% -1.08%   -1.06% -1.35% -1.37%
JPY -0.10% 1.87% 0.76% -0.01% 1.03%   -0.29% -0.31%
NZD 0.23% 2.14% 1.05% 0.28% 1.32% 0.30%   -0.04%
CHF 0.22% 2.18% 1.09% 0.31% 1.36% 0.31% 0.04%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).


What is the role of the Reserve Bank of India?

The role of the Reserve Bank of India (RBI), in its own words, is “ 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.

How do the decisions of the Reserve Bank of India affect the Rupee?

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.

Does the Reserve Bank of India directly intervene in FX markets?

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.

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