The Indian Rupee (INR) is facing challenges as tensions escalate in the Red Sea and the US Dollar (USD) gains strength. The recent rise in India’s wholesale inflation further adds to the pressure. This article examines the factors impacting the INR and its outlook in the current market conditions.
The ongoing tensions in the Red Sea have raised concerns about a potential oil price hike. Houthi attacks on commercial ships have the potential to disrupt the global supply chain, leading to a $10-20 increase in oil prices. As India is the world’s third-largest oil importer and consumer, it is particularly vulnerable to such price hikes. This situation has prompted some sellers to take a cautious approach, adding to the selling pressure on the INR.
The strength of the US Dollar is another factor contributing to the INR’s struggles. The escalating tensions in the Red Sea have boosted safe-haven assets, with the Greenback being one of the major beneficiaries. As a result, the USD/INR pair has remained within a trading band between 82.80 and 83.40 since September 2023. The downward momentum is supported by technical indicators such as the 100-period Exponential Moving Average (EMA) and the 14-day Relative Strength Index (RSI) below the 50.0 midpoint, indicating further downside potential for the INR.
India’s wholesale inflation, as measured by the Wholesale Price Index (WPI), has been outside the deflationary zone for two consecutive months. In December, it reached a nine-month high of 0.73%, primarily driven by a rise in food prices. The higher inflation rate adds to the concerns surrounding the INR’s performance, as it may hinder the country’s economic growth and affect the purchasing power of consumers.
India’s trade deficit decreased to $19.8 billion in December 2023, compared to $23.14 billion in the same month the previous year. However, the country’s goods imports totaled $58.25 billion, while exports amounted to $38.45 billion. This trade deficit highlights the challenges faced by the Indian economy and the impact it may have on the INR.
The US NY Empire State Manufacturing Index and the US Retail Sales data are among the economic indicators that market players are closely monitoring. These reports will provide insights into the performance of the US economy, which could have indirect implications for the INR.
The INR is highly sensitive to external factors, and several key elements influence its value. These include the price of crude oil, as India heavily relies on imported oil; the value of the US Dollar, as most trade is conducted in USD; and the level of foreign investment. Moreover, direct intervention by the Reserve Bank of India (RBI) in foreign exchange markets and the level of interest rates set by the RBI play significant roles in determining the performance of the INR.
Higher interest rates usually strengthen the INR, as they attract foreign investment. However, inflation, interest rates, GDP growth rate, balance of trade, and inflows from foreign investment also impact the INR’s value. For instance, a higher growth rate and a less negative balance of trade are generally positive for the INR, while higher inflation can have negative implications. The RBI actively intervenes in forex markets to maintain a stable exchange rate and adjusts interest rates to manage inflation.
The Indian Rupee is currently facing challenges from rising tensions in the Red Sea and the strength of the US Dollar. The recent rise in wholesale inflation further adds pressure on the INR. Factors like crude oil prices, the value of the USD, foreign investment, and macroeconomic indicators play crucial roles in determining the trajectory of the Indian Rupee. As market players closely monitor these developments, the INR’s performance in the near term remains uncertain.
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