With the Reserve Bank of India (RBI) cutting interest rates and the odds of a September rate adjustment from the Federal Reserve increasing, the US Dollar to Indian Rupee (USD/INR) exchange rate moved between highs of 64.2523 and lows of 63.6617 over the past five days.
Last week the RBI opted to cut borrowing costs for a third time this year, slashing the repo rate to 7.25% in an attempt to spur domestic growth. In an accompanying policy statement the central bank asserted that further interest rate revisions would be dependent on inflationary developments. At the time, analysts with HDFC Bank noted; ‘The scope for a another rate cut of 25 basis points still remains but its timing will remain contingent on how incoming data pans out and how global triggers – the normalisation of monetary policy in the US in particular – unfold.’
The USD/INR exchange rate fell to a low of 63.6895 following the decision but managed to recoup losses ahead of the publication of the US Non-Farm Payrolls report as US Services data dropped to its lowest level in 13-months and pushed back US interest rate hike expectations. However, the US Dollar rallied against its emerging-market rivals on Friday as the latest US employment data put a September rate adjustment from the Fed back on the table. The USD/INR currency pair was trending at 64.1520 before the weekend.
At the outset of this week the Rupee posted its biggest decline against the US Dollar in two weeks as the repercussions from the US labour market data continued to be felt. As one locally based trader noted; ‘The positive jobs numbers have given a boost to the Dollar against major Asian currencies. The data have raised the bets on a Fed increase in interest rates in September.’ After falling by 0.5% the Rupee briefly recouped losses after it was reported that US President Barack Obama isn’t comfortable with the current strength of the ‘Greenback’. As it was feared that the US chief could pressure the Fed into leaving fiscal policy unchanged, the rumoured comments drove the US Dollar lower across the board. However, both White House officials and the President himself later assured investors that no such remarks had been made, so the US Dollar swiftly recovered lost ground.
In the days ahead the USD/INR exchange rate could experience volatility in response to the US Advance Retail Sales report. The sales data for April disappointed forecasts by showing stagnation, but economists are anticipating a sturdy rebound of 1.2% in May. If consumer spending looks like it’s picking up it will add more fuel to the rate-hike fire and bolster the US Dollar further. Conversely, a less-than-impressive print could inspire a Rupee rally. Further Rupee movement is likely to occur on Friday when India publishes a number of potentially-influential ecostats, including inflation data for May and Industrial/Manufacturing Production figures for April. Both manufacturing and industrial output are believed to have increased on the year – a development which would be Rupee supportive.