The Indian Rupee (INR) saw a decline in the early European session on Tuesday, breaking a three-day-winning streak. This drop comes following the release of India’s Wholesale Price Index (WPI) inflation data, which showed a decrease to 1.31% year-on-year in August from 2.04% in the previous month. This figure was weaker than the expected 1.80%, as per the latest official data. The INR faced pressure from a renewed demand for the US Dollar (USD) from local importers, especially oil companies. Additionally, the rise in crude oil prices could further hurt the local currency, as India is a major oil consumer. Despite these factors, the anticipation of a significant Federal Reserve (Fed) interest rate cut, along with a weaker USD and substantial foreign fund inflows into Indian equities, may provide support for the appreciation of the INR. Investors will be closely watching the US Retail Sales data scheduled for release later on Tuesday.
In terms of economic indicators, there was a positive inflation rate in August 2024, primarily driven by price increases in various sectors including food articles and processed food products. The Reserve Bank of India (RBI) Governor projected India’s economy to grow at a rate of around 7.5% or higher, exceeding the RBI’s current forecast. In the US, the NY Empire State Manufacturing Index improved in September, beating expectations. Investors are increasingly betting on a 50 basis point Fed rate cut, with a 67% chance now priced in, according to the CME FedWatch Tool. Analysts, however, are leaning towards a 25 basis point cut based on recent job and inflation data.
From a technical analysis perspective, the USD/INR pair still maintains a bullish outlook despite the INR weakening on the day. The price remains above the key 100-day Exponential Moving Average (EMA) on the daily chart. However, there is a possibility of further downside as the 14-day Relative Strength Index (RSI) is in the bearish zone. A decisive break above the 83.90-84.00 resistance level could lead to a bounce towards 84.50. On the downside, initial support lies at 83.82, with the 100-day EMA at 83.64 being the next relevant level.
Inflation, a measure of the rise in prices of goods and services, is an important economic indicator. Core inflation, which excludes volatile elements like food and fuel, is the figure targeted by central banks to maintain stable prices. Central banks raise interest rates to combat high inflation, attracting more capital inflows and strengthening the currency. Higher inflation usually results in a stronger currency due to the positive impact of higher interest rates. Gold, historically a hedge against inflation, may see fluctuations in demand based on inflation levels and interest rate movements. Lower inflation tends to be positive for Gold as it leads to lower interest rates, making the precious metal a more attractive investment option.
Overall, the Indian Rupee faces challenges from domestic and global factors such as inflation data, USD demand, oil prices, and Fed rate cut expectations. However, positive economic projections, strong foreign fund inflows, and technical indicators suggest potential support for the INR. Investors will closely monitor upcoming economic data releases to gauge the direction of the currency markets.
