The Indian Rupee (INR) has been trading on a negative note on Friday due to a stronger US Dollar. In addition, India’s Wholesale Price Index-based inflation has dropped to a four-month low, which was weaker than expected. Investors are closely watching the Indian Trade Balance data and US preliminary Michigan Consumer Sentiment, both of which are due on Friday. This article will delve into the impact of various macroeconomic factors on the exchange rate of the Indian Rupee.
India’s Wholesale Price Index-based inflation dropped to 0.20% YoY in February from 0.27% in January, falling below the market expectation of 0.25%. The Indian WPI Food saw an increase of 6.95% YoY in February, while the WPI Fuel fell by 1.59% YoY. Higher inflation typically weakens a currency, as it reflects devaluation through oversupply. On the other hand, higher interest rates usually strengthen the Rupee. The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate and adjusts interest rates to control inflation.
Macroeconomic factors such as inflation, interest rates, economic growth rate (GDP), balance of trade, and inflows from foreign investment play a crucial role in determining the value of the Indian Rupee. A higher growth rate can lead to more overseas investment, boosting demand for the Rupee. Furthermore, a positive balance of trade and higher real interest rates are beneficial for the Rupee. Foreign Direct and Indirect Investment (FDI and FII) inflows also impact the Rupee exchange rate positively.
From a technical perspective, the USD/INR pair remains stuck within a descending trend channel around 82.60–83.15 since December 8, 2023. The pair holds below the key 100-day Exponential Moving Average (EMA) on the daily chart, indicating a bearish trend. However, the 14-day Relative Strength Index (RSI) suggests that further upside cannot be ruled out in the near term. Key resistance levels for the pair are at 83.00 and 83.15, while support levels are at 82.80 and 82.60.
The Indian Rupee exchange rate is influenced by a variety of macroeconomic factors such as inflation, interest rates, economic growth, trade balance, and foreign investment. The Reserve Bank of India plays a crucial role in maintaining the stability of the exchange rate through interventions in FX markets and adjusting interest rates. Investors and traders closely monitor these factors to make informed decisions about trading the Indian Rupee.
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