USD/INR remains strong, Indian Manufacturing PMI eases to 56.5 in September

• Indian Rupee softens in Tuesday’s early European session.
• The Indian August HSBC Manufacturing PMI came in at 56.5 vs. 57.5 prior, weaker than expected.
• The renewed USD demand, volatile crude oil prices, foreign outflows of funds undermine the INR.
• The US ISM Manufacturing PMI for September will be in the spotlight on Tuesday.​​​​​​

The Indian Rupee (INR) trades in negative territory for the third consecutive day on Tuesday. The latest data released on Tuesday showed that the HSBC India Manufacturing Purchasing Managers Index (PMI) eased to 56.5 in September. This figure was below the market consensus of 56.7 and the previous reading of 57.5. The local currency remains weak in an immediate reaction to the downbeat PMI data.

The downtick of the local currency is pressured by strong US Dollar (USD) demand from foreign banks. Additionally, the volatile crude oil prices amid rising tensions in the Middle East and the outflow of foreign funds contribute to the INR’s downside.

However, the anticipation of additional interest rate reduction by the Federal Reserve might cap the upside for the pair. Investors will keep an eye on the US ISM Manufacturing Purchasing Managers Index (PMI), which is due on Tuesday. Also, the Fed’s Raphael Bostic and Lisa Cook are scheduled to speak.  

Daily Digest Market Movers: Indian Rupee remains sensitive to global factors

• "The rupee, after experiencing a decent appreciation, has begun drifting back toward its typical range. This shift is driven by month-end dollar demand from importers, coupled with the RBI’s active management of the currency," said Amit Pabari, managing director at FX advisory firm CR Forex.
• India’s current account balance moved into a deficit of $9.7 billion in the April-June quarter (Q1) of 2024-25 (FY25), accounting for 1.1% of Gross Domestic Product (GDP), according to the Reserve Bank of India (RBI). 
• Fed Chair Jerome Powell said on Monday that the recent half-percentage point interest rate cut shouldn’t be interpreted as a sign that future moves will be as aggressive. Powell added that further rate cuts are in the pipeline, though their size and pace would depend on the evolution of the economy.
• Powell further stated that the Fed's current goal is to support a largely healthy economy and job market, rather than rescue a struggling economy or prevent a recession.
• Interest rate futures contracts have priced in a nearly 35.4% chance of a half-point cut in November, versus a 64.6% possibility of a quarter-point cut, according to the CME FedWatch Tool.

Technical Analysis: USD/INR’s positive outlook prevails

The Indian Rupee trades on a weaker note on the day. The USD/INR pair keeps the bullish vibe on the daily timeframe as the price holds above the key 100-day Exponential Moving Average (EMA). Nonetheless, further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) hovers around the midline, indicating neutral momentum. 

The 84.00 psychological mark appears to be a tough nut to crack for USD/INR bulls. A decisive break above this level could see a rally to 84.15, the high of August 5. The next upside barrier is seen at 84.50. 

On the flip side, the 100-day EMA at 83.62 acts as an initial support level for USD/INR. Extended losses could pave the way to 83.00, representing the psychological level and the low of May 24.

RBI FAQs

What is the role of the Reserve Bank of India?

The role of the Reserve Bank of India (RBI), in its own words, is '..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.

How do the decisions of the Reserve Bank of India affect the Rupee?

The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.

Does the Reserve Bank of India directly intervene in FX markets?

Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.

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