The Indian Rupee (INR) is trading near a new record low on Wednesday, continuing its downward trajectory due to persistent foreign fund outflows and a subdued performance in domestic equities. Adding to the pressure, India’s merchandise trade deficit in November widened significantly, further weighing on the INR. However, the Reserve Bank of India’s (RBI) regular foreign exchange interventions, where it sells USD through state-owned banks, could offer some support and prevent a more severe depreciation of the rupee.
Looking ahead, the focus is on the US Federal Reserve’s interest rate decision, with markets anticipating a quarter-percentage-point rate cut at the December meeting. Investors will also be watching Fed Chair Jerome Powell’s press conference and the Summary of Economic Projections (or ‘dot plot’) for any signals of a more hawkish stance, which could bolster the US dollar and place additional pressure on the INR.
Trade Deficit Pushes INR to New Lows
Weaker Asian market cues and India’s record-high trade deficit in November have contributed to a sharp decline in the Indian Rupee, spurring investor anxiety and triggering sell-offs in domestic equities. The country’s merchandise trade deficit hit a record $37.8 billion in November, up from $27.1 billion in October. Exports fell 4.9% year-on-year to $32.1 billion, while imports surged 27% to $69.95 billion during the same period.
On the US economic front, retail sales in November rose 0.7% month-on-month, surpassing expectations of a 0.5% increase. Meanwhile, industrial production edged down by 0.1% month-on-month, slightly worse than expectations of a 0.3% rise. These data points contribute to the broader economic outlook that traders are factoring into their expectations for the US Federal Reserve’s December decision.
Fed’s Rate Cut Expectations Support USD, Weigh on INR
The CME FedWatch tool now signals a nearly 97% probability of a 25 basis points (bps) rate cut at the Fed’s December meeting, a sharp rise from about 78% just a week ago. Any hawkish comments from Fed officials could strengthen the US dollar, putting further downward pressure on the Indian Rupee.
USD/INR Bullish Outlook Remains Intact
Despite the ongoing weakness of the INR, the USD/INR pair continues to hold a bullish outlook in the longer term. The pair is trading above the key 100-day Exponential Moving Average (EMA), and the 14-day Relative Strength Index (RSI) remains above the neutral 50 level, suggesting that further upside is likely.
The immediate resistance for USD/INR is near the ascending trend channel and the psychological level of 85.00. If the pair sustains trading above this threshold, it could target the 85.50 level. On the downside, initial support is located at the lower boundary of the trend channel near 84.80, with a potential retest of the November 25 low at 84.22. A breach of this support could expose the 100-day EMA around 84.15.
In conclusion, the Indian Rupee faces significant downside risks due to external and domestic factors, including a widening trade deficit and Fed rate expectations. However, the RBI’s interventions and strong technical support for USD/INR provide a buffer against a sharper decline.
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