- The Indian Rupee weakens near a record low in Friday’s early European session.
- A negative trend in domestic equities and rising USD demand from importers weigh on the INR.
- India’s Federal Fiscal Deficit for October and GDP growth data for Q2 FY25 will be released later on Friday.
The Indian Rupee (INR) extends its decline near its all-time low on Friday. The rise in US Treasury bond yields, the month-end US Dollar (USD) demand and Foreign Portfolio Investors (FPIs) selling domestic equities exert some selling pressure on the local currency. Despite these challenges, the Reserve Bank of India (RBI) is likely to routinely intervene in the foreign exchange (forex) market by selling USD to prevent the INR from depreciating amidst global volatility.
Later on Friday, India’s Federal Fiscal Deficit for October and Gross Domestic Product (GDP) growth data for the July-September 2024 quarter (Q2 FY25) will be in the spotlight. If the GDP report shows a stronger-than-expected outcome, this could help limit the INR’s losses.
Indian Rupee seems vulnerable amid multiple headwinds
- Foreign investors withdrew nearly $1.4 billion from Indian equities on Thursday, preliminary exchange data showed, spurring a 1.5% fall in the BSE Sensex index. These investors took out $11 billion from Indian equities last month.
- India’s Gross Domestic Product (GDP) growth is estimated to align with the RBI’s target of 7.0% for the second quarter of FY25.
- India’s economy is likely to grow at its slowest pace in one and a half years in the three months to the end of September as weak consumption offsets a strong recovery in government spending, according to a Reuters poll.
- The RBI is set to hold interest rates on December 6 due to a sharp rise in consumer inflation, per Reuters.
- The markets now see nearly a 66.5% chance that the Fed will cut rates by a quarter point in December, up from 55.7% before the PCE data, according to the CME FedWatch Tool.
USD/INR maintains the bullish sentiment in the longer term
The Indian Rupee softens on the day. The strong uptrend of the USD/INR pair prevails, with the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The 14-day Relative Strength Index stands above the midline near 62.90, suggesting that the support is likely to hold rather than break.
In the bullish case, the crucial resistance level emerges at the 84.50-84.55 region. Consistent trading above this level could attract enough momentum traders to push USD/INR to the 85.00 psychological mark.
On the flip side, sustained trading below the lower limit of the trend channel of 84.27 could open the possibility of a retest of 83.96, the 100-day EMA. A break below the mentioned level could lead to a downside breakout. The next support level to watch is 83.65, the low of August 1. 
RBI FAQs
The role of the Reserve Bank of India (RBI), in its own words, is “..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.
The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.