Indian Rupee (INR) Recovery Amid Weaker US Dollar (USD)
INR Strengthens Against USD
On Thursday, the Indian Rupee (INR) showed signs of recovery against the US Dollar (USD), primarily due to a weaker USD. The INR had closed stronger on Wednesday, attributed to USD sales from foreign banks and a likely intervention from the Reserve Bank of India (RBI). Additionally, investors began to factor in two interest rate cuts by the Federal Reserve (Fed) this year, which further weighed down the Greenback and created a headwind for the USD/INR pair.
Key Economic Indicators to Watch
Several key economic indicators are due to be released, which could impact the USD/INR pair:
- US Weekly Initial Jobless Claims and Balance of Trade: These figures are set to be released on Thursday and will be closely monitored by investors.
- RBI’s Interest Rate Decision: Scheduled for Friday, no change in the interest rate is expected. However, any unexpected decision could influence the INR.
- US Nonfarm Payrolls Data: Stronger-than-expected data could bolster the USD and limit the downside for the USD/INR pair.
Domestic Challenges for India
India faces multiple challenges that could impact the INR:
- Political Shifts: Political changes in India could create volatility in the market.
- Downbeat PMI Data: The HSBC India Services PMI dropped to 60.4 in May from 60.8 in April, marking the lowest level since December 2023. This could exert selling pressure on the INR.
- Structural Reforms: Any changes to India’s structural reforms could also affect the INR negatively.
Market Movements: Indian Rupee Rebounds Amid Likely RBI Intervention
Foreign Investment Trends
Overseas investors withdrew 678 million from Indian equities on Wednesday alone, totaling 1.5 billion over two days. According to the National Securities Depository Limited (NSDL):
- Tuesday: Investors sold 1,466.3 million worth of Indian shares while buying 103.3 million in Indian bonds.
- Wednesday: The withdrawal continued, highlighting a trend that could impact the INR.
Performance of Indian Equity Indices
Despite the withdrawals, benchmark Indian equity indices showed resilience:
- BSE Sensex and Nifty 50: Both indices gained on Wednesday, closing the session higher by about 3% each. This recovery came after logging their steepest fall in four years in the previous session.
PMI Data and Economic Outlook
The HSBC India Services PMI, which measures the performance of the services sector, showed a slight decline:
- May PMI: Dropped to 60.4 from 60.8 in April.
- Consecutive Expansion: This marked the 34th consecutive month of expansion in services activity, although at a slower pace compared to previous months.
Political and Economic Commentary
HDFC Bank economist Sakshi Gupta commented on the short-term volatility:
- Election Results: The Bharatiya Janata Party (BJP) won 240 seats in the Lok Sabha elections, followed by the Indian National Congress with 99 seats and the Samajwadi Party with 37 seats.
- Volatility: The election results are likely to keep both the rupee and bond yields volatile in the short run.
Global Economic Indicators
US Economic Data
The US economy also released key data that could impact the USD/INR pair:
- ISM Services PMI: Improved to 53.8 in May from 49.4 in April, exceeding the estimation of 50.8. This stronger-than-expected figure could provide some support to the USD.
- Fed Rate Cut Expectations: Traders are now pricing in a nearly 70% chance of a Fed rate cut in September, up from 54.9% at the beginning of the week, according to the CME FedWatch tool.
Impact on USD/INR Pair
The combination of domestic and international factors creates a complex environment for the USD/INR pair:
- Fed Rate Cuts: The expectation of rate cuts by the Fed could weaken the USD, providing support for the INR.
- US Economic Data: Stronger-than-expected data from the US could counteract this trend, supporting the USD and limiting the downside for the USD/INR pair.
- RBI Intervention: Any intervention by the RBI could further influence the INR’s strength against the USD.
Conclusion
The Indian Rupee’s recovery against the US Dollar is influenced by a combination of domestic and international factors. Weaker USD, potential Fed rate cuts, and likely RBI intervention have all played a role in strengthening the INR. However, challenges such as political shifts, downbeat PMI data, and changes to structural reforms in India could exert selling pressure on the INR. Investors will closely monitor upcoming economic indicators, including the US weekly Initial Jobless Claims, Balance of Trade, RBI’s interest rate decision, and US Nonfarm Payrolls data, to gauge the future direction of the USD/INR pair.