Rupee Analysis: INR Rises Ahead Of US June PCE Data

July 26, 2024

New Delhi, India

The Indian Rupee (INR) posted modest gains in Friday’s Asian session, recovering some lost ground against the US Dollar (USD). This rebound follows a weaker Greenback and potential Reserve Bank of India (RBI) interventions.

Key Factors Impacting INR:

• US Dollar Demand: Month-end demand for the USD and foreign outflows from Indian markets dragged the INR to an all-time low on Thursday.
• Foreign Fund Outflows: Forex traders attribute the INR’s recent decline to foreign fund outflows from Indian equities. This trend follows the Indian government’s decision to increase capital gains tax on equity investments and equity derivative trades.
• RBI Intervention: The RBI’s potential intervention, supported by record-high foreign exchange reserves, might limit the INR’s downside.

Upcoming US PCE Data: Investors are keenly awaiting the US Personal Consumption Expenditures (PCE) Price Index data for June, due on Friday. The PCE data is expected to show a 0.1% month-on-month increase. The Core PCE, the Fed’s preferred inflation measure, is anticipated to ease to 2.5% year-on-year from 2.6%. Softer PCE inflation data could prompt the Fed to consider lowering its key interest rate as early as September, potentially weakening the USD.

Comments from Indian Government: Ajay Seth, India’s Economic Affairs Secretary, mentioned the possibility of imposing caps on local bonds if inflows surge. He noted that the government could conduct more bond buybacks depending on market conditions, while also making incremental changes to control foreign fund inflows.

Market Dynamics:

• Importer Activity: Importers have been aggressively purchasing the USD to benefit from relatively lower crude oil prices in recent weeks.
• US Economic Data:
  • GDP Growth: US GDP grew at a 2.8% annualized rate in the latest reading, up from 1.4%, and exceeding forecasts of 2%.
  • Initial Jobless Claims: Claims for the week ending July 20 increased to 235K, compared to the previous week’s 245K, and were below the expected 238K.
  • Durable Goods Orders: Orders fell by 6.6% month-on-month in June, from a 0.1% increase in May, missing the consensus of 0.3%. Core Durable Goods (excluding transportation) rose by 0.5% month-on-month in June, surpassing projections.

At the time of writing this article, USDINR was trading at Rs. 83.725 down  -0.030(-0.04%).