USD/INR looks set to hit an all-time high close of around 92.80 on Monday. The pair is trading much higher as the Indian rupee (INR) is under intense selling pressure amid the war in the Middle East involving the United States (US), Iran and Israel, which has sent oil prices soaring.
In European trading, WTI futures on NYMEX are 12% higher to almost $100. The price of oil in Asian trade rose to almost $113.00 after airstrikes by the US and Israel in a joint operation over the weekend on several Iranian oil depots raised concerns about the risk of energy supplies.
However, the price of crude oil gave up most of its previous gains after reports showed that G7 members and the International Energy Agency (IEA) will discuss the release of emergency oil reserves.
However, higher oil prices remain a major concern for the Indian rupee as the currencies of countries such as India, which rely heavily on oil imports to meet their energy needs, remain highly sensitive to changes in the price of oil.
Meanwhile, the Reserve Bank of India (RBI) intervention in the forex market at the opening of the session to support the Indian rupee from excessive one-way moves did not weigh on the USD/INR pair. According to a Reuters report, the Indian central bank has probably sold US dollars to support the INR, Reuters reports.
Apart from weakening the Indian rupee, a higher US dollar (USD) amid risk-free market sentiment also strengthened the USD/INR pair. At press time, the US Dollar Index (DXY), which tracks the value of the US dollar against six major currencies, is 0.5% higher at near 99.35.
On the macroeconomic front, investors will focus on February’s Consumer Price Index (CPI) data for both the US and India, which will be released on Wednesday and Thursday, respectively.
Indian Rupee FAQs
The Indian rupee (INR) is one of the most sensitive currencies to external factors. The price of oil (the country is largely dependent on imported oil), the value of the US dollar – most trade takes place in USD – and the level of foreign investment are influenced. Direct intervention by 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 major factors influencing the rupee rate.
The Reserve Bank of India (RBI) actively intervenes in the forex markets to maintain a stable exchange rate and facilitate trading. Additionally, the RBI is trying to keep the inflation rate at the target of 4% by adjusting interest rates. Higher interest rates tend to strengthen the rupee. This is due to the role of the carry trade, where investors borrow from countries with lower interest rates to place their money in countries offering relatively higher interest rates and profit from the difference.
Macroeconomic factors affecting the value of the rupee include inflation, interest rates, economic growth rate (GDP), trade balance and foreign investment inflows. A higher growth rate may lead to more foreign investment, increasing demand for the rupee. A less negative trade balance will ultimately lead to a stronger rupee. Higher interest rates, especially real rates (interest rates net of inflation), are also positive for the rupee. A risk-laden environment may lead to higher inflows of foreign direct and indirect investment (FDI and FII), which also benefits the rupee.
Higher inflation, especially if it is comparably higher than in other Indian countries, is generally negative for the currency because it reflects devaluation due to oversupply. Inflation also increases the cost of exports, which leads to more rupees being sold to buy foreign imports, which is negative against the rupee. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates, which can be positive for the rupee due to increased demand from international investors. The opposite effect occurs in the case of lower inflation.
