USD/INR loses ground as traders brace for Indian WPI inflation data

• The Indian Rupee gains groound in Monday’s early European session. 
• Elevated oil prices and sustained outflows from local stocks weigh on the INR; RBI intervention might help limit its losses. 
• India’s Wholesale Price Index (WPI) inflation data will take center stage on Monday. 

The Indian Rupee (INR) recovers some lost ground on Monday after retreating to an all-time low in the previous session. The concerns about the recent spike in oil prices amid geopolitical tensions, significant foreign investor sell-offs from the equity market and higher demand for the greenback from foreign banks undermine the local currency. 

Nonetheless, the likely intervention from the Reserve Bank of India (RBI) by US Dollar sales from state-run banks might cap the downside for the INR. Traders will keep an eye on India’s Wholesale Price Index (WPI) Inflation on Monday, which is expected to rise to 1.90% YoY in September from 1.31% in August. On the US docket, the NY Empire State Manufacturing Index for October will be released. 

Daily Digest Market Movers: Indian Rupee recovers, potential upside seems limited

• “Indian Rupee fell below the 84 per US Dollar mark for the first time on demand from foreign banks amid FII outflows and elevated crude oil prices. Weak domestic markets also weighed on the Rupee,” said Anuj Choudhary, Research Analyst, Sharekhan by BNP Paribas.
• The annual PPI rose 1.8% YoY in September, compared to a 1.9% increase seen in August, and came in above the market expectation of 1.6%. The core PPI climbed 2.8% YoY in the same period, surpassing analysts' forecast of 2.7%. 
• On a monthly basis, the US PPI was unchanged in September, while the core PPI was up 0.2% during the same period.
• The preliminary reading of the US University of Michigan Consumer Sentiment Index fell to 68.9 in October from 70.1 in September, below the consensus of 70.8. The 5-year consumer inflation expectations came in at 3.0% in September.
• The swaps markets show the Fed’s odds for a 25 bps rate cut at 86.8%, up from 83.3% before the PPI data, according to the CME FedWatch Tool.

Technical Analysis: USD/INR’s broader trend remains constructive

The Indian Rupee trades in positive territory on the day. The positive view of the USD/INR pair remains intact as the pair is still above the ascending trend line and the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Additionally, the 14-day Relative Strength Index (RSI) is located above the midline near 64.20, hinting that the uptrend is more likely to gain traction than reverse.

The first upside barrier of USD/INR emerges near the all-time high of 84.15. A continuation of the climb past this level could pave the way for a test of 84.50. 

On the flip side, the resistance-turned-support level at 83.90 acts as an initial support level for the pair. A breach of the mentioned level could see a drop to the 100-day EMA at 83.69, followed by 83.00, representing the round mark 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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