- USD/INR experienced a significant surge, marking one of its most substantial single-day movements in recent times.
- Geopolitical tensions between India and Pakistan are escalating rapidly amidst ongoing military engagements.
- The two nations have been embroiled in numerous conflicts over the disputed Kashmir region for decades.
USD/INR soared to new peaks on Thursday, propelled by a sharp depreciation of the Indian Rupee (INR). The rise in the exchange rate coincides with heightened military conflict between India and Pakistan, both of whom maintain competing claims over the Kashmir region. The recent attack on civilians in Indian-administered Kashmir has triggered a robust response from India, despite Pakistan’s repeated denials of any involvement or support for the attack.
India and Pakistan each administer portions of Kashmir, but both assert full sovereignty over the entire territory, leading to at least three major wars between the two countries in the past. This latest escalation in military tensions is contributing to broader geopolitical instability across the region. With both nations possessing nuclear capabilities, the stakes are exceptionally high. The ongoing conflict has seen an increase in retaliatory attacks from both sides, further exacerbating the situation.
Rising Geopolitical Tensions Amid Escalating Military Strikes
Pakistani officials have stated that India’s recent counter-offensive struck several densely populated areas within the Punjab province, and have vowed to respond with increased assertiveness to any further Indian military actions. The Indian Rupee is on track to decline by approximately 1.5% in a single day of trading, reflecting the negative impact of escalating wartime tensions on investor sentiment. The Sensex Index, a benchmark index comprising 30 leading stocks listed on the Bombay Stock Exchange, experienced a sharp decline of over 400 points in early Thursday trading, with the most significant losses concentrated in the banking sector, automotive industry, and fast-moving consumer goods (FMCG) companies. This market reaction underscores the sensitivity of Indian equities to geopolitical risk. Furthermore, analysts are closely monitoring the potential impact on foreign investment flows into India, which could further pressure the Rupee if investors adopt a risk-averse stance.
USD/INR Technical Forecast
Despite the significant intraday losses impacting the Indian Rupee, the USD/INR pair remains within familiar near-term trading ranges. The pair is currently on pace to record its largest single-day gain since late 2019, as the US Dollar strengthens against the Rupee. This sharp reversal of recent bearish momentum has propelled the pair back above its 200-day Exponential Moving Average (EMA), which is currently positioned near 85.25. This level is now being closely watched as a key support area.
USD/INR has surged by nearly 1.5% on Thursday, reaching a multi-week high above the 86.00 level. Market participants are now assessing whether this breakout can be sustained, or if it represents a temporary overshoot driven by heightened risk aversion. The near-term outlook for the pair will likely remain highly sensitive to developments in the geopolitical situation between India and Pakistan.
USD/INR daily chart
Indian Rupee FAQs
The Indian Rupee (INR) is particularly susceptible to external influences. Key determinants include the price of crude oil, given India’s significant reliance on oil imports, the valuation of the US Dollar, as the majority of international trade is transacted in USD, and the volume of foreign investment inflows. Furthermore, direct interventions by the Reserve Bank of India (RBI) in foreign exchange markets to stabilize the exchange rate, alongside the interest rate policies implemented by the RBI, exert considerable influence on the Rupee’s performance.
The Reserve Bank of India (RBI) actively participates in forex markets to ensure exchange rate stability, thereby facilitating international trade. Additionally, the RBI aims to maintain inflation around its target of 4% through adjustments to interest rates. Typically, higher interest rates tend to strengthen the Rupee. This effect is largely attributable to the ‘carry trade,’ where investors borrow funds in countries with lower interest rates to invest in countries offering relatively higher interest rates, capitalizing on the interest rate differential.
Macroeconomic variables that impact the Rupee’s value encompass inflation rates, interest rates, the rate of economic growth (GDP), the trade balance, and foreign investment inflows. A higher growth rate can attract increased foreign investment, leading to greater demand for the Rupee. A less negative trade balance will eventually contribute to a stronger Rupee. Elevated interest rates, particularly real interest rates (interest rates adjusted for inflation), are also beneficial for the Rupee. A risk-on environment can stimulate greater inflows of Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII), which also support the Rupee.
Elevated inflation, especially when comparatively higher than that of India’s peer nations, generally exerts downward pressure on the currency, reflecting devaluation due to oversupply. Inflation also increases the cost of exports, leading to increased sales of Rupees to purchase foreign imports, which is detrimental to the Rupee’s value. Conversely, higher inflation typically prompts the Reserve Bank of India (RBI) to raise interest rates, which can be positive for the Rupee due to increased demand from international investors. The opposite holds true for lower inflation.
