Strong foreign inflows support Indian Rupee outperformance despite US Dollar surge

Against the US Dollar, the Indian Rupee climbs to a new six-month high.
Indian equities continue to attract increased investment from FIIs.
Expectations of a larger Fed rate hike lift the US Dollar above its other peers.

Strong overseas investment inflows into Indian equities support further gains in the Indian Rupee (INR) against the US Dollar (USD) on Thursday, with a fresh six-month low recorded. As the domestic currency outperforms, USD/INR slips towards 93.65.

With global Artificial Intelligence (AI) stocks facing fresh challenges and energy prices declining, “India” has gained appeal as a competitive investment bet. Foreign Institutional Investors (FIIs) are consequently continuing to expand their exposure to Indian equities.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Net buying by FIIs has continued on every trading day so far in November apart from the Diwali Muhurat session on Sunday, 08 November. Their cumulative investment stands at Rs. 65,735.57 crore.

What new challenges are facing the global AI sector?

AI-linked stocks were thrown into turmoil as the Democrats’ victory in the United States (US) midterm elections raised concerns over whether spending on AI infrastructure would continue.

Further pressure on AI stocks could now come from fears that Nvidia’s CEO Jensen Huang may be replaced. These follow New York Times (NYT) reports of his extramarital affair with alleged Chinese spy Alice Huang, alongside rumours of a relationship with his subordinate Kimberly Powell, Nvidia's vice president of health care.

According to The Wall Street Journal (WSJ), Nvidia's board was preparing to remove the CEO, with the next 48 hours flagged as potentially volatile.

How do lower oil prices support net energy importers?

Currencies of economies heavily reliant on imported oil for their energy requirements, including India, have become more attractive as oil prices decline. The fall reflects hopes that the US and Iran would favour a deal over renewed military attacks.

At the time of writing, a 2.42% decline has left the MCX Crude Oil contract expiring on 19 November slightly below Rs. 8,000.

Why are investors looking past the US Dollar’s strength?

Despite a sharp advance in the US Dollar over the past few trading days, the Indian currency maintains its outperformance. During Asian trading, a new 18-month high near 103.06 is recorded by the US Dollar Index (DXY), which measures the Greenback against six major currencies.

The prospect of a larger interest rate increase at the Federal Reserve’s (Fed) December policy meeting is being factored into financial markets, supporting the US Dollar.

TD Securities has reiterated that the data “certainly seals a Dec rate hike by the Fed.” In the bank’s assessment, the “strong upside surprise in the Consumer Price Index (CPI) data makes a December hike all but certain,” while Governor Waller’s comments before the CPI release have brought the potential need for a “catch-up” move into sharper focus. As strategists put it, “after Waller's speech on Tuesday, the debate has now shifted to whether the FOMC will go 25 or 50bps,” with TD Securities framing the choice as a “catch-up 50bps rate hike in December, or whether to maintain course with a 25bps rate increase and provide strong guidance toward a potential January follow-through.” Their current position remains that “we still favor a 25bp hike with a rising risk of another hike in January.”

USD/INR Technical Analysis: Can the Decline Continue?

A bearish short-term outlook remains in place on the daily chart, where USD/INR stands at 93.69. Spot continues to trade beneath the 20-period exponential moving average (EMA) of 94.58.

Trading below this short-term trend gauge indicates that sellers retain the upper hand. However, a Relative Strength Index (14) reading near 24 points to oversold conditions, which could temper further losses without signalling a confirmed reversal yet.

Any recovery faces an initial obstacle at the 20-day EMA of 94.5812, the immediate resistance level that is limiting rebound attempts. On the downside, further weakness could take the pair towards 93.00.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Indian Rupee: Frequently Asked Questions

Which key forces drive the Indian Rupee?

External developments have a particularly strong influence on the Indian Rupee (INR). Key drivers include Crude Oil prices, given India’s heavy reliance on imported oil, foreign investment levels and the US Dollar’s value, as most trade is settled in USD. The Rupee is also significantly affected by the interest rates set by the Reserve Bank of India (RBI) and its direct intervention in foreign exchange markets to stabilise the exchange rate.

How do Reserve Bank of India decisions affect the Indian Rupee?

To facilitate trade through exchange-rate stability, the Reserve Bank of India (RBI) intervenes actively in forex markets. It also adjusts interest rates to keep inflation at its 4% target. Rate increases generally support the Rupee through the ‘carry trade’: investors borrow in lower-interest-rate countries and invest those funds in countries offering comparatively higher rates, seeking to earn the difference.

Which macroeconomic indicators shape the Indian Rupee’s value?

Inflation, interest rates, economic growth (GDP), the trade balance and foreign investment inflows all help determine the Rupee’s value. Faster growth can attract additional overseas investment and increase demand for the currency, while a narrowing trade deficit will eventually strengthen it. Higher interest rates are supportive too, particularly real rates, which are interest rates adjusted for inflation. Greater risk appetite can encourage additional Foreign Direct and Indirect Investment (FDI and FII) inflows, also benefiting the Rupee.

What effect does inflation have on the Indian Rupee?

The Rupee generally faces pressure from higher inflation, especially when it exceeds that of India’s peers, because this reflects devaluation through excess supply. As inflation raises export costs, more Rupees are sold to pay for foreign imports, adding to the negative impact on the currency. However, higher inflation also usually prompts interest rate increases by the Reserve Bank of India (RBI). These can support the Rupee by drawing greater demand from international investors. Lower inflation has the opposite effects.