Indian Rupee Strengthens as Inflation Eases, But Global Tensions Loom

Indian Rupee

January 15, 2023

New Delhi, India

USD/INR Analysis

The Indian Rupee (INR) kicked off the week on a positive note, benefiting from a weaker US Dollar and lower-than-expected domestic retail inflation. However, global tensions, particularly in the Red Sea, add a layer of uncertainty to the currency’s outlook.

Positive Start Amid Dollar Weakness: The INR gained ground as the USD weakened, marking a positive beginning for the week. Retail inflation in India for December came in at 5.69%, slightly below the market expectation of 5.87%. Although it remains above the Reserve Bank of India’s target, the figure is within the tolerable range of 2–6%.

Eyes on Wholesale Price Index (WPI): Investors are closely monitoring the upcoming WPI inflation report, set to be released on Monday. The WPI Fuel, WPI Food, and Trade Balance data will also be scrutinized, shaping market sentiment and influencing the USD/INR currency pair.

Global Tensions Pose Risks: Concerns about geopolitical tensions in the Red Sea, highlighted by Houthi attacks on commercial ships, add a layer of caution. The World Economic Forum warns that such events could negatively impact oil-importing countries, including India.

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US Economic Indicators and Market Sentiment:

US Economic Indicators and Market Sentiment: Despite the US Producer Price Index (PPI) experiencing a modest increase below anticipated levels, the predominant factor influencing USD/INR is expected to be market sentiment. This is especially true in the absence of significant top-tier US economic data due to the Martin Luther King Jr.’s Birthday bank holiday.

Technical Analysis Points to Bearish Outlook: Technically, the USD/INR pair exhibits a bearish vibe, remaining within a trading range since September 2023. The breach of key support levels could lead to further downside movement, as indicated by the 14-day Relative Strength Index (RSI) below the 50.0 midpoint.

Market Expectations and Future Scenarios: Investors are currently pricing in a 74.2% probability of a rate cut in March, reflecting expectations of monetary policy adjustments. The technical analysis suggests potential upside barriers at 83.00 and 83.40, while downside risks involve breaching key support levels.

Conclusion: The Indian Rupee starts the week on a positive note, leveraging a softer USD and lower retail inflation. However, global tensions and cautious market sentiment, along with technical signals, highlight the delicate balance influencing the USD/INR pair in the coming days. The focus remains on the WPI data and how geopolitical events unfold.

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