Indian Rupee opens lower as renewed US-Iran tensions lift oil prices
- The Indian Rupee drops against the US Dollar at the start of the US data-packed week.
- Higher oil prices due to renewed US-Iran tensions have weighed on the Indian Rupee.
- Fed’s Warsh reiterates that officials are committed to countering high inflation.
The Indian Rupee (INR) opens slightly lower against the US Dollar (USD) at the start of the week. The USD/INR pair ticks up to near 95.43, as higher oil prices due to renewed tensions between the United States (US) and Iran have weighed on the Indian currency.
In the opening session, the MCX Crude Oil price contract expiring on September 21 trades 2.13% higher to near Rs. 8,160.
Lower oil prices bode well for currencies from economies such as India, which rely heavily on oil imports to meet their energy needs.
US and Iran exchange attacks near Hormuz Strait
The exchange of attacks between the US and Iran over the weekend has refreshed fears of military aggression in the Middle East. On Sunday, the US Central Command (CENTCOM) struck Iranian rocket launchers that were preparing to send mines into the Strait of Hormuz, following weeks of relative calm, Bloomberg reported.
In response, Iran's Islamic Revolutionary Guard Corps (IRGC) launched ballistic missile strikes on two US bases in Jordan in retaliation for the US attack on Larak Island.
The restart of the war could prompt fears of a prolonged global oil supply disruption. Financial market participants might not have anticipated US military aggression, as it said earlier this month that it would pursue economic pressure on Tehran to force it to a deal.
Fed’s Warsh reiterates upside inflation risks
At the Jackson Hole Symposium on Friday, Federal Reserve (Fed) Chairman Kevin Warsh reiterated that board members are committed to bringing inflation down to the 2% target.
“This summer's inflation data better than expected, but do not tell me underlying trends have meaningfully changed," Fed Chair Warsh said and added, "Fed's predominant focus right now should be on prices."
Warsh didn’t deliver any remarks regarding the monetary policy outlook, as expected; however, traders raised Fed interest rate hike bets following his remarks.
According to the CME FedWatch tool, the odds of the Fed leaving interest rates unchanged again in the September meeting have diminished to 39.4% from almost 60% seen a week ago.
US NFP will be key event
This week, the major trigger for the US Dollar will be the US Nonfarm Payrolls (NFP) data for August, which will be released on Friday. Investors will closely track the official employment data to get fresh cues regarding the Fed’s interest rate outlook.
July’s NFP report strongly impacted the Fed’s interest rate expectations after it revealed that US employers fired 23K workers while they were anticipated to hire 80K fresh workers.
USD/INR Technical Analysis
In the daily chart, USD/INR trades at 95.43, maintaining a neutral near-term bias as spot remains close to the 20-day exponential moving average (EMA) at 95.53.
The Relative Strength Index (RSI) around 45 stays below the neutral 50 line, reinforcing a lack of bullish momentum rather than signaling oversold conditions.
On the topside, immediate resistance is located at the 20-day EMA near 95.53, which needs to be reclaimed to ease the current bearish tone and open the way for a more sustained recovery. Above the dynamic EMA, the 96.00 level could act as a key hurdle for the pair. Looking down, the August 5 low at 94.92 could be the key support level.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.