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14.02.2025, 02:44

USD/INR remains firm above 86.50 on renewed US Dollar demand

  • USD/INR trades firmer to near 86.70 in Friday’s Asian session. 
  • Trump and Modi aim to cut the US trade gap with India amid global tariff concerns. 
  • The RBI intervention might help limit the INR’s losses. 

The USD/INR pair trades in positive territory around 86.70 during the Asian trading hours on Friday. The renewed US Dollar (USD) demand from importers underpins the pair. Investors await India’s Wholesale Price Index (WPI) inflation and US Retail Sales for January later on Friday for fresh impetus. 

US President Donald Trump said on Thursday that Indian Prime Minister Narendra Modi offered to talk about easing tariffs and importing more US oil and gas to shrink the trade deficit between the two countries. Market players will closely monitor the development surrounding tariff policies between the US and India. Any signs of escalating trade tensions could support the Greenback, the safe-haven currency. 

Foreign institutional investors (FIIs) continue to hold approximately $800 billion worth of Indian equities, but their ongoing selling remains a risk for the Indian stock market. This, in turn, could drag the local currency lower and act as a tailwind for USD/INR.

On the other hand, the upside for the pair might be capped amid the intervention by the Reserve Bank of India (RBI). Since Monday, when the INR reached a record low of 88 against the Greenback, the Indian central bank has intensified its intervention by selling the USD in both the spot and forward markets. 

Indian Rupee FAQs

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.

The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.

Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.

Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.

 

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