The Indian Rupee (INR) is currently experiencing a downturn, primarily driven by persistent foreign investor outflows and a renewed demand for the US Dollar (USD). As foreign institutional investors (FIIs) continue to sell Indian equities and bonds, the pressure on the INR intensifies. In January alone, foreign capital outflows have reached approximately $6.5 billion, marking the highest monthly exit since October 2023. This trend raises concerns as it reflects an overarching uncertainty among investors regarding India’s economic outlook amidst a complex global backdrop.
Additional factors contributing to the rupee’s weakness include heightened demand for USD, particularly from importers needing to settle international transactions. As global dynamics fluctuate, the attractiveness of the USD often increases, which in turn accelerates the depreciation of the INR. However, there is a slight silver lining in the form of declining crude oil prices, pivotal for India as it ranks among the top three oil consumers in the world. A reduction in oil prices can alleviate some pressure on the INR by potentially lowering the import bill, hence supporting the currency in the face of various challenges.
In response to these developments, the Reserve Bank of India (RBI) has taken proactive measures, particularly through dollar-rupee swaps, aimed at managing market liquidity. This intervention is crucial in maintaining stability in the face of a fluctuating forex market. By bolstering the INR against a backdrop of increased USD demand, the RBI’s actions reflect a conscious effort to navigate the complexities of the current economic landscape.
Market participants are keenly awaiting the US weekly initial Jobless Claims data, due later on Thursday, as a potential indicator of economic strength and its implications on forex rates. In addition, Friday’s announcements regarding the preliminary reading of HSBC India’s Purchasing Managers Index (PMI) alongside US S&P PMI data for January will provide vital insights into the economic climate. These indicators are crucial for investors, offering a clearer picture of both domestic and international economic conditions.
Amid these financial currents, an important upcoming event is the national budget presentation by Finance Minister Nirmala Sitharaman on February 1. With forecasts suggesting an 8% increase in major subsidies for the next fiscal year, reaching approximately 4.1 trillion rupees ($47.41 billion), the budget will undoubtedly reflect the challenges of a slowing growth trajectory in Asia’s third-largest economy. Concurrently, the Securities and Exchange Board of India (SEBI) is promoting financial inclusion through proposed sachet-sized investment plans aimed at attracting new investors to mutual funds.
Despite the prevailing negative sentiment surrounding the INR, technical indicators paint a somewhat resilient picture. The USD/INR pair has been forming higher highs and higher lows, indicating potential support levels may hold. With the 14-day Relative Strength Index (RSI) sitting above the midline at 67.30, there is a suggestion that momentum could remain bullish. Nevertheless, key resistance lies at an all-time high of 86.69; if this threshold is surpassed sustainably, it could signal a bullish rally towards the significant psychological level of 87.00.
While the Indian Rupee faces numerous challenges in the short term, including foreign outflows and fluctuating global conditions, several factors may mitigate its decline and provide a platform for potential recovery. The situation remains fluid, and the forthcoming economic data will likely play a pivotal role in shaping the currency’s trajectory in the coming days.