Strong foreign inflows drive Indian Rupee outperformance despite US Dollar surge

A fresh six-month high marks the Indian Rupee’s advance against the US Dollar.
Indian equities attract further investment from FIIs.
Expectations of a larger Fed rate hike emerge, lifting the US Dollar above its other peers.

USD/INR drops towards 93.65. Strong overseas inflows into Indian equities support the Indian Rupee (INR), which extends its gains against the US Dollar (USD) on Thursday, posting a fresh six-month low.

Fresh challenges for global Artificial Intelligence (AI) shares, alongside cheaper energy, have reinforced the appeal of “India” as a competitive investment destination. Foreign Institutional Investors (FIIs) are consequently continuing to expand their exposure to Indian equities.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Cumulative investment by foreign investors has reached Rs. 65,735.57 crore. Throughout November so far, FIIs have been net buyers in every trading session apart from the Diwali Muhurat session on Sunday, 08 November.

Global AI stocks face fresh headwinds

Following the Democrats’ victory in the United States (US) midterm elections, doubts over whether AI infrastructure spending would continue sent AI-related shares into turmoil.

AI shares could now face further pressure from concerns that Nvidia’s CEO Jensen Huang may be replaced. Those fears follow New York Times (NYT) reports of his extramarital affair with alleged Chinese spy Alice Huang, as well as rumours of a relationship with his subordinate Kimberly Powell, Nvidia's vice president of health care.

According to the Wall Street Journal (WSJ), Nvidia's board was preparing to remove the CEO. The report also flagged potential volatility over the next 48 hours.

Cheaper oil supports net energy importers

Currencies of economies heavily reliant on imported oil, including India, have become more attractive as oil prices retreat. The decline reflects hopes that the US and Iran would favour an agreement over renewed military attacks.

At the time of writing, a 2.42% decline leaves the MCX Crude Oil contract expiring on 19 November slightly below Rs. 8,000.

Rupee gains despite broader US Dollar strength

Around 103.06 marks a fresh 18-month high for the US Dollar Index (DXY) in Asian trading. The index measures the Greenback against six major currencies. Despite the US Dollar’s sharp gains over the past few trading days, the Indian currency continues to outperform it.

Growing consideration of a larger Federal Reserve (Fed) interest rate increase at the December policy meeting is supporting the US Dollar in financial markets.

TD Securities reiterated that the inflation figures “certainly seals a Dec rate hike by the Fed.” The bank said the “strong upside surprise in the Consumer Price Index (CPI) data makes a December hike all but certain,” while strategists observed that “after Waller's speech on Tuesday, the debate has now shifted to whether the FOMC will go 25 or 50bps,” with Governor Waller’s comments before the CPI release bringing a potential “catch-up” move into sharper focus. The choice, TD Securities writes, is a “catch-up 50bps rate hike in December, or whether to maintain course with a 25bps rate increase and provide strong guidance toward a potential January follow-through.” Their current view remains that “we still favor a 25bp hike with a rising risk of another hike in January.”

93.69: USD/INR Technical Outlook

At 93.69 on the daily chart, USD/INR remains below its 20-period exponential moving average (EMA) of 94.58, leaving the near-term outlook bearish.

A Relative Strength Index (14) reading near 24 indicates oversold conditions, which could temper further losses but does not yet confirm a reversal. Sellers retain the upper hand after the pair’s break below this short-term trend gauge.

Further weakness could take the pair towards 93.00. On any recovery, the first resistance is the 20-day EMA at 94.5812, which restrains rebound attempts and represents the initial barrier to a meaningful advance.

(The technical analysis of this story was written with the help of an AI tool. Learn more.)

Indian Rupee: Key Questions

Indian Rupee: Main exchange-rate drivers

External developments have a particularly strong influence on the Indian Rupee (INR). Key variables include Crude Oil prices, given India’s heavy dependence on imported Oil; the US Dollar’s value, as most trade is settled in USD; and the scale of foreign investment. The Reserve Bank of India (RBI) also plays a major role through direct FX market intervention to stabilise the exchange rate and through the interest rates it sets.

RBI policy: Implications for the Indian Rupee

To facilitate trade, the Reserve Bank of India (RBI) seeks exchange-rate stability through active intervention in forex markets. It also adjusts interest rates to keep inflation at its 4% target. Rate increases tend to support the Rupee because of the ‘carry trade’: investors borrow in lower-interest-rate countries and invest the proceeds in countries offering higher rates, earning the difference.

Indian Rupee: Macroeconomic influences

Inflation, interest rates, economic growth (GDP), the trade balance and foreign investment inflows all help determine the Rupee’s value. Faster growth can attract additional overseas capital and increase demand for the currency. A smaller trade deficit will ultimately strengthen the Rupee, while higher interest rates, particularly real rates after subtracting inflation, also provide support. Greater appetite for risk can encourage Foreign Direct and Indirect Investment (FDI and FII) inflows, benefiting the currency as well.

Inflation: Effects on the Indian Rupee

For the Rupee, higher inflation is usually adverse, especially when it exceeds inflation in India’s peer economies, because it signals devaluation through excess supply. Rising prices also make exports more costly, prompting more Rupees to be sold to pay for foreign imports and weighing on the currency. However, higher inflation typically prompts the Reserve Bank of India (RBI) to increase interest rates. That can attract international investor demand and support the Rupee. Lower inflation produces the reverse effects.