Indian Rupee hits fresh six-month low as AI slowdown fears trigger global sector rotation

The Indian Rupee rallies further against the US Dollar due to multiple tailwinds.
Global sector rotation amid AI spending slowdown fears and lower oil prices have underpinned the INR.
FIIs have made investment worth Rs. 32,210.20 crore in the Indian stock market in the last four trading days.

The Indian Rupee (INR) strengthens further against the US Dollar (USD) on Friday. The USD/INR pair posts a fresh nearly six-month low near 94.08, as of writing.

The Indian currency has been outperforming due to lower oil prices and the consistent inflow of foreign funds into the Indian stock market.

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As of writing, the MCX Crude Oil contract expiring on November 19 is up 1.36% to near Rs. 8,670. Oil prices have bounced back after hitting a fresh almost two-month low at Rs. 8,191. However, oil prices are down almost 13.5% from its multi-month high of Rs. 9,972.

Currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, tend to outperform in a low-oil-price environment.

FII flows into India increase significantly

The inflow of foreign capital into the Indian stock market has remained robust in the past few weeks, easing fears of depleting foreign exchange (forex) reserves.

So far in November, Foreign Institutional Investors (FIIs) have poured investment worth Rs. 32,210.20 crore.

A significant acceleration in FIIs buying is triggered by global sector rotation, following the victory of Democrats in the United States (US) midterm elections, leading to fears of a slowdown in spending on Artificial Intelligence (AI). Other key triggers include significant correction in oil prices, and strong Q2 corporate earnings of India Inc.

However, market experts caution that the sustainability of momentum in FIIs buying depends largely on factors outside India. “Much of the capital that left chased the US-led AI and semiconductor trade; some returns only if that trade cools. For flows to turn durable, the rupee must stabilise, crude must stay soft, clarity must emerge on a US–India trade deal, and — above all — Indian corporate earnings must deliver upgrades. For now, this is welcome stabilisation, not yet a trend," Akash Garg at Choice Wealth said, The New Indian Express reported.

US NFP data awaited

Investors keenly await the US Nonfarm Payrolls (NFP) data for October, which will be published at 12:30 GMT. The employment data is expected to have a significant impact on the US Dollar’s outlook.

Ahead of the US NFP data, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.2% higher to near 101.77.

According to TD Securities, October’s US employment report is likely to show only modest job creation, with economists looking for nonfarm payrolls to “remain subdued at 40K after job gains moderated to 29K in September.” They note that “despite the subdued, below-consensus print, our forecast would be within the range of breakeven job gains and result in an increase in the three-month moving average,” suggesting underlying momentum is not as weak as the headline figure implies. TD also flags that “risks to our payrolls forecast are to the upside,” cautioning that “seasonal factors could reverse again more than expected and lead to a stronger print.”

USD/INR Technical Analysis

USD/INR declines to near 94.08 on Friday, extending its retreat and holding below the 20-day exponential moving average (EMA) at 94.99, which caps the upside and reinforces a bearish near-term bias. The latest Relative Strength Index (RSI) reading at 29.29 sits in oversold territory, hinting that while downside pressure dominates, the sell-off could be stretched in the short term.

On the topside, immediate resistance is located at the 20-day EMA around 94.99, and a sustained recovery above this barrier would be needed to ease the current bearish tone. On the downside, the pair could extend its decline towards 94.00.

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

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

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.

How do the decisions of the Reserve Bank of India impact the Indian 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.

What macroeconomic factors influence the value of the Indian Rupee?

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.

How does inflation impact the Indian 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.

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