The Indian Rupee Faces Challenges Amid Global Factors
- The Indian Rupee trends lower in Friday’s early European session.
- The Indian equity selloff and the rise in crude oil prices continue to undermine the INR.
- The advanced US November Michigan Consumer Sentiment data and Fed Bowman’s speech will be the highlights on Friday.
As the Indian Rupee (INR) weakens on Friday, it faces several challenges driven by both domestic and global factors. The local currency has depreciated to record lows amidst weak domestic equities and sustained foreign fund outflows. Additionally, the rise in crude oil prices has added further pressure on the INR.
Factors Influencing the Indian Rupee:
- Weakness in Indian equity markets
- Sustained foreign fund outflows
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Looking ahead, the INR’s movement may be influenced by external factors, such as the anticipated policies of US President Donald Trump, which could boost the US Dollar (USD) and push US yields higher. This could potentially contribute to the downward trend of the INR. However, the Reserve Bank of India (RBI) is expected to intervene in the market by selling USD to prevent excessive volatility in the local currency.
Key Market Insights and Trends
- Foreign investors have withdrawn over $1.5 billion from local stocks in November.
- India’s lower trade dependency on China positions it favorably compared to other Asian peers.
- The Federal Open Market Committee (FOMC) recently lowered the benchmark overnight borrowing rate by 25 basis points.
Analysis of Recent Fed Actions:
- Fed Chair Jerome Powell emphasized a cautious approach to interest rate cuts.
- The possibility of a rate reduction in December has increased, as per the CME FedWatch Tool.
- US Initial Jobless Claims for the week ending October 25 showed a slight increase to 221K.
Technical Analysis of USD/INR
Despite the Indian Rupee trading softer, the USD/INR pair remains in a bullish trend, supported by key technical indicators. The price is currently above the 100-day Exponential Moving Average (EMA), indicating a positive outlook. However, the overbought condition of the 14-day Relative Strength Index (RSI) suggests potential consolidation before further appreciation.
Potential Price Movements:
- A move above the upper boundary of the trend channel could lead to resistance levels at 84.30 and 84.50.
- A breach of the lower limit of the trend channel may result in support levels at 84.05 and 83.82.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.