The Indian Rupee opens near historical lows against the Dollar

• The Indian Rupee falls to a historic low of approximately 88.45 against the US Dollar at the start of trading on Monday.
• India's GDP in the second quarter surprisingly grew at a solid rate of 7.8%.
• The U.S. Dollar weakens amid uncertainty ahead of the U.S. labor market data.

The Indian Rupee (INR) opens on a positive note near its historical lows against the US Dollar (USD) at the beginning of the week. The USD/INR pair is trading firmly near 88.45 as the imposition of higher tariffs by the United States (EE.UU.) on India, and the steady outflow of foreign funds from Indian stock markets, have weighed on the Indian currency.

In August, Washington raised tariffs on imports from New Delhi to 50% from 25% for buying oil from Russia, claiming that Indian money is financing Moscow's war in Ukraine. The imposition of higher tariffs on India by the U.S. has weakened the competitiveness of products manufactured by Indian export-oriented sectors.

On Friday, Foreign Institutional Investors (FIIs) sold a massive amount of shares worth Rs. 8,312.66 crores in the Indian stock markets. Cumulatively, the FIIs have reduced holdings worth Rs. 94,569.6 crores in July and August, after buying Rs. 24,011.43 crores in Indian shares during the March-June period of the year.

Meanwhile, India's second-quarter GDP data has proven surprisingly stronger. The data showed on Friday that the economy grew at an annualized rate of 7.8%, faster than the 7.4% increase seen in the first quarter of the year. Economists had expected GDP growth to be 6.6%.

On the global front, Indian Prime Minister Narendra Modi's and Chinese President Xi Jinping's comments following a meeting at the Shanghai Cooperation Organization summit (SCO) over the weekend indicate signs of improvement in relations between the two nations. "We are committed to advancing our relations based on mutual respect, trust, and sensitivities," Modi said, according to Reuters.

Market Factors: USD/INR rises despite Dollar weakness

• The USD/INR pair continues to trade higher although the US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, extends its losing streak for the fifth consecutive day amid a holiday in the U.S. on Monday for Labor Day. At the time of writing, the Dollar Index is trading near its monthly low of around 97.70.
• The greenback faces selling pressure as investors become cautious, with a series of indicators related to the U.S. labor market scheduled to be released this week. Investors will pay particular attention to data related to employment, as it significantly influenced market expectations regarding the Federal Reserve's monetary policy outlook in early August.
• Speculation about a rate cut by the Fed at the September policy meeting intensified after the July Non-Farm Payroll report (NFP) showed a downward revision in the employment figures for May and June.
• Currently, the CME FedWatch tool shows that there is an 87.6% probability that the Fed will cut interest rates at this month's policy meeting.
• Meanwhile, several members of the Federal Open Market Committee (FOMC), including Chairman Jerome Powell, have also expressed concern about an increase in downside risks to the labor market.
• Another reason behind the weakness of the Dollar is the growing concerns about the credibility of U.S. President Donald Trump's economic policies and a threat to the independence of the Fed.
• On Friday, a panel of judges in Washington issued a verdict against Trump's tariff agenda, labeling it "illegal" and accusing him of improperly invoking emergency law. The event has raised concerns about the future of Trump's international policies. However, market experts believe that Trump will find a way to keep the tariffs in effect. "I doubt it will move the market if the tariffs are to remain in force, and even if it is ruled that they are illegal, I think Trump will find another legal avenue to implement them," analysts from the Commonwealth Bank of Australia noted.
• Last week, the lawsuit filed by the Fed governor, Lisa Cook, against her dismissal by President Trump over mortgage-related accusations also reached the courts. Market experts see this event as a serious blow to the independence of the Fed.

Technical Analysis: USD/INR remains above the 20-day EMA

USD/INR recovers historical highs around 88.45 on Monday. The short-term trend of the pair remains bullish as it stays above the 20-day Exponential Moving Average (EMA), which is trading near 87.60.

The 14-day Relative Strength Index (RSI) stabilizes above 60.00, suggesting that a new bullish momentum has come into effect.

Looking down, the 20-day EMA will act as a key support for the major pair. At the top, the pair has entered uncharted territory. The round figure of 89.00 would be the key obstacle for the pair.

Frequently Asked Questions about the Indian Rupee

( What are the key factors driving the Indian Rupee?

The Indian Rupee )INR### is one of the currencies most sensitive to external factors. The price of crude oil (the country largely depends on imported oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, all of which are influential. The direct intervention of the Reserve Bank of India (RBI) in the foreign exchange markets to maintain a stable exchange rate, as well as the level of interest rates set by the RBI, are other important factors influencing the Rupee.

( How do the decisions of the Reserve Bank of India impact the Indian Rupee?

The Reserve Bank of India )RBI### actively intervenes in the foreign exchange markets to maintain a stable exchange rate, to facilitate trade. Additionally, the RBI aims to keep the inflation rate at its target of 4% by adjusting interest rates. Higher interest rates generally strengthen the Rupee. This is due to the role of the "carry trade" in which investors borrow in countries with lower interest rates to place their money in countries that offer relatively higher interest rates and benefit from the difference.

( What macroeconomic factors influence the value of the Indian Rupee?

The macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate )GDP###, the trade balance, and foreign investment inflows. A higher growth rate can lead to more foreign investment, increasing the demand for Rupee. A less negative trade balance will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation), are also positive for the Rupee. An environment of greater risk appetite can lead to higher inflows of Direct and Indirect Foreign Investment (FDI and FII), which also benefits the Rupee.

( How does inflation affect the Indian Rupee?

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