USD/INR will likely open higher on Friday as Mideast optimism eases

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The USD/INR pair is expected to open higher on Friday after a holiday in Indian markets on Thursday due to Ram Navami celebrations.

USD/INR is expected to open positively on Friday as Iran’s rejection ceasefire proposal revives Middle East risks.
US President Trump warns of consequences if Iran won’t be prepared for a ceasefire.
The Indian Rupee continues to face backlash from higher oil prices and foreign outflows.

The USD/INR pair is expected to open higher on Friday after a holiday in Indian markets on Thursday due to Ram Navami celebrations. The pair is expected to trade firmly as demand for safe-haven assets has improved amid fears of a prolong war in the Middle East, which involves the United States (US), Israel, and Iran.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.15% higher to near 99.80.

Fears of a prolong Middle East war have escalated as Iran rejects United States (US) President Donald Trump’s month-long ceasefire proposal and the 15-point settlement plan, and has proposed its own conditions, which include recognition of Tehran’s authority at the Strait of Hormuz, an end to attacks on Hezbollah with the closure of US bases in the Gulf region, no interference in Tehran’s missile program, and compensation of damages, the Wall Street Journal (WSJ) reported.

In response, a US official has described Tehran’s demands as “ridiculous and unrealistic”. During late European trading hours, US President Trump has warned of consequences, through a post on Truth.Social to Iran for rejecting ceasefire.

"They are “begging” us to make a deal, which they should be doing since they have been militarily obliterated, with zero chance of a comeback, and yet they publicly state that they are only “looking at our proposal”," Trump wrote and added, "WRONG!!! They better get serious soon, before it is too late, because once that happens, there is NO TURNING BACK, and it won’t be pretty!"

Meanwhile, weakness in the Indian Rupee due to the continuous outflow of foreign funds from the Indian stock market and a sharp recovery in the oil prices due to revived Mideast tensions is expected to offer strength to the USD/INR pair.

So far in March, Foreign Institutional Investors (FIIs) have remained net sellers on all trading days and offloaded their stake worth Rs. 1,07,009.53 crore.

Currencies from economies that rely heavily in oil imports to meet their energy needs face selling pressure in a high oil price environment.

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.