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- Indian Rupee experiences depreciation in early Wednesday European trading session.
- Elevated geopolitical risks stemming from India-Pakistan relations exert downward pressure on the INR.
- Market participants are keenly awaiting the release of US ADP Employment Change, PCE inflation data, and the initial estimate of Q1 GDP later today.
The Indian Rupee (INR) is trading weaker on Wednesday, influenced by escalating geopolitical tensions between India and Pakistan. Reports, though unverified, of heightened military activity have prompted the closure of numerous tourist locations in Kashmir since Tuesday, contributing to market unease and a risk-off sentiment.
However, the downside for the INR may be limited by positive momentum in domestic equity markets and a decline in crude oil prices. Furthermore, foreign portfolio investors have increased their buying activity in Indian equities over the past week, signaling a potential shift in sentiment after previous selling pressure earlier in the month. This renewed interest from foreign investors could provide some support to the Rupee.
Looking ahead, market participants will be closely monitoring the US ADP Employment Change report, scheduled for release later on Wednesday. In addition, the Personal Consumption Expenditures Price Index (PCE), a key inflation gauge watched by the Federal Reserve, and the advance estimate of Q1 Gross Domestic Product (GDP) will be closely scrutinized for indications about the health of the US economy. On Friday, attention will shift to the US April Nonfarm Payrolls (NFP) report, which will provide further insights into the state of the labor market. Analysts anticipate the NFP report to show a moderate increase in employment, with the unemployment rate remaining near historic lows.
Indian Rupee declines amid escalating tensions between India and Pakistan
- Pakistan’s minister for information and broadcasting has stated that Islamabad possesses “credible intelligence” suggesting that India is planning a military strike within the next 24 to 36 hours, according to reports from Aljazeera. This statement has further heightened anxieties in the region.
- “While sentiment is moderately positive for the Rupee, driven by increased portfolio inflows, geopolitical risks continue to pose a threat to the currency,” noted Dilip Parmar, a forex research analyst at HDFC Securities. He added that any escalation in regional tensions could trigger a flight to safety, negatively impacting the INR.
- Pakistan’s defence minister indicated on Monday that a military incursion by neighboring India was imminent following a deadly militant attack on tourists in Kashmir last week, as reported by Reuters. The minister’s comments have further fueled concerns about a potential military confrontation.
- US Treasury Secretary Scott Bessent stated on Monday that numerous top trading partners of the US have presented “very good” proposals aimed at preventing the imposition of US tariffs, adding that one of the initial agreements to be finalized is likely to be with India. This development suggests progress in trade negotiations between the two countries.
- US job openings decreased to 7.19 million in March, marking the lowest level since September 2024, compared to a revised figure of 7.48 million in February, according to data released by the US Bureau of Labor Statistics on Tuesday. This figure fell short of the market consensus forecast of 7.5 million, indicating a potential slowdown in labor demand.
- The US Conference Board’s Consumer Confidence Index registered a decline to 86.0 in April, down from 93.9 in March (revised from 92.9). This reading represents the lowest level since April 2020, reflecting growing concerns among consumers about the economic outlook.
- The probability of a rate cut by the US Federal Reserve (Fed) increased to 56.8% as weaker-than-anticipated labor market and sentiment data amplified concerns regarding the strength of economic growth. This shift in market expectations reflects growing uncertainty about the future path of US monetary policy.
USD/INR maintains negative momentum below the 100-day EMA
The Indian Rupee is exhibiting weakness in today’s trading session. The bearish outlook for the USD/INR pair remains intact, as evidenced by the price action consistently trading below the crucial 100-day Exponential Moving Average (EMA) on the daily chart. This technical indicator suggests that the overall trend favors further depreciation of the Rupee against the US Dollar. Furthermore, the bearish momentum is reinforced by the 14-day Relative Strength Index (RSI), which is currently positioned below the midline near 39.70, indicating that the pair is not yet oversold and has room for further decline.
A decisive break below the lower boundary of the descending trend channel at 84.70 could trigger increased selling pressure, potentially pushing the pair towards 84.22, the low recorded on November 25, 2024. Should the bearish momentum persist, further losses could lead to a decline towards 84.08, the low reached on November 6, 2024. These levels represent key support areas that could provide some temporary respite for the Rupee.
Conversely, on the upside, the primary resistance level for the pair is observed at 85.78, coinciding with the 100-day EMA. A sustained period of trading above this level could indicate a potential trend reversal and pave the way for a move towards 86.35, the upper limit of the descending trend channel. A break above this channel could signal a more significant shift in market sentiment and a potential strengthening of the Indian Rupee.
RBI FAQs
The Reserve Bank of India (RBI) defines its role as “..to maintain price stability while keeping in mind the objective of growth.” This mandate primarily involves maintaining the inflation rate at a stable 4% level, primarily through the use of interest rate adjustments. The RBI also manages the exchange rate to prevent excessive volatility and potential disruptions for exporters and importers, given India’s significant reliance on foreign trade, particularly in the oil sector.
The RBI convenes formally in six bi-monthly meetings each year to deliberate on monetary policy and, if deemed necessary, adjust interest rates. When inflation exceeds the 4% target, the RBI typically raises interest rates to curb borrowing and spending, which can provide support for the Rupee (INR). Conversely, if inflation falls significantly below the target, the RBI may lower interest rates to stimulate lending, which can exert downward pressure on the INR.
Recognizing the critical importance of trade to the Indian economy, the Reserve Bank of India (RBI) actively participates in foreign exchange markets to maintain the exchange rate within a defined range. This intervention aims to shield Indian importers and exporters from undue currency risk during periods of heightened FX volatility. The RBI engages in both buying and selling Rupees in the spot market at strategically important levels and utilizes derivative instruments to hedge its positions and manage its overall exposure.
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