USD/INR rebounds as foreign outflows weigh on Indian Rupee

• The Indian Rupee loses momentum in Monday's early European session. 
• The Indian HSBC Manufacturing PMI came in at 57.5 in October vs. 56.5 prior, stronger than expected.
• Persistent selling by overseas investors weigh on the INR.

The Indian Rupee (INR) edges lower on Monday. The sustained foreign outflows from domestic stocks and rising crude oil prices exert some selling pressure on the local currency. However, the decline in the US Dollar (USD) amid the likely unwinding of long positions in the lead-up to the US presidential election might cap the INR’s downside.

The latest data released on Monday showed that the HSBC India Manufacturing Purchasing Managers Index (PMI) improved to 57.5 in October. This figure was above the market consensus of 57.4 and the previous reading of 56.5. The local currency remains strong in an immediate reaction to the upbeat PMI data.

The US presidential election and the Federal Reserve's (Fed) interest rate decision will be in the spotlight this week and might trigger volatility in the market. The Federal Reserve is widely anticipated to cut rates by 25 basis points (bps) at its November meeting on Thursday.  

Daily Digest Market Movers: Indian Rupee weakens ahead of looming US presidential election  

• The benchmark BSE Sensex and Nifty 50  equity indexes fell about 1.5% each on the day, pressured by likely selling by overseas investors and caution ahead of the US presidential election outcome.
• "India's headline manufacturing PMI picked up substantially in October as the economy's operating conditions continue to broadly improve," noted Pranjul Bhandari, chief India economist at HSBC.
• The Reserve Bank of India (RBI) is likely selling US Dollars near 84.1125-84.1150 rupee levels, per Reuters.
• According to a Reuters poll, the Indian rupee will trade in a tight range around current levels against the dollar over the coming year as the Reserve Bank of India (RBI) routinely dips into its FX reserves to manage the currency's stability.
• "The (FX) intervention has been an ongoing affair and it's not just this year, it's been continuing post-COVID so we would expect two-sided interventions to continue," noted Vivek Kumar, an economist at QuantEco Research.
• The Nonfarm Payrolls (NFP) in the US rose by 12K in October, following the 223K increase (revised from 254K) seen in September, the US Bureau of Labor Statistics (BLS) showed Friday. The figure was weaker than the market expectations of 113K by a wide margin. 
• The Unemployment Rate held steady at 4.1% in October, in line with the consensus.
• "It is widely considered that a Trump win will be positive for the USD, though many feel this outcome has been discounted," noted Chris Weston, an analyst at broker Pepperstone. 

Technical Analysis: USD/INR’s positive view remains in play in the longer term

The Indian Rupee trades weaker on the day. However, the bullish outlook of the USD/INR pair remains intact, with the price holding above the key 100-day Exponential Moving Average (EMA). The upward momentum is reinforced by the 14-day Relative Strength Index (RSI), which stands above the midline near 57.70.

The first upside barrier for USD/INR emerges at the upper boundary of the ascending trend channel of 84.24. Extended gains break above this level could draw in enough buying demand to 84.50, en route to the 85.00 psychological level. 

On the downside, a decisive close below the lower limit of the trend channel near 84.05 could pave the way to 83.78, the 100-day EMA. 

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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