USD/INR holds above 88.50 amid thin trading due to the Indian bank holiday

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USD/INR moves little after registering mild gains in the previous session, trading around 88.70 during the Asian hours on Wednesday. The pair is likely to see limited movement amid thin trading as markets observe a bank holiday in India.

USD/INR maintains its position as markets observe a bank holiday in India.
The US Dollar could face challenges amid the ongoing US government shutdown.
The Indian Rupee weakened amid persistent foreign fund outflows from the Indian equity market.

The USD/INR pair inched lower as the US Dollar (USD) held slight losses amid ongoing economic concerns, driven by the US government shutdown. The impasse has now entered its sixth week and is poised to become the longest federal funding lapse in US history after the Senate once again failed to pass a short-term funding bill. The most recent attempt to resolve the standoff, Republican-backed temporary legislation, was rejected by the Senate for the 14th time on Tuesday.

However, the USD/INR pair may gain ground as the Greenback may further advance due to the cautious sentiment surrounding the US Federal Reserve (Fed) policy stance for December. Fed Chair Jerome Powell stated during last week’s post-meeting press conference that another rate cut in December remains uncertain. Powell also cautioned that policymakers might need to adopt a wait-and-see stance until the release of new official data resumes.

The Indian Rupee (INR) also came under pressure amid continued foreign fund outflows from the Indian equity market. Foreign Institutional Investors (FIIs) have been net sellers for the past four months, though the pace of selling moderated in October. Traders expect the Reserve Bank of India (RBI) to intervene in the currency market to support the Indian Rupee in the upcoming sessions.

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

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.

How do the decisions of the Reserve Bank of India impact the Indian 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.

What macroeconomic factors influence the value of the Indian Rupee?

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.

How does inflation impact the Indian 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.

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