USD/INR rises before the GST council meeting in India

• The Indian Rupee slightly falls against the American Dollar at the opening before the two-day GST council meeting.
• Indian Commerce Minister Goyal confirmed that New Delhi is in negotiations with Washington regarding a trade agreement.
• A sharp increase in long-term bond yields worldwide drives demand for safe assets.

The Indian Rupee (INR) opens slightly lower against the US Dollar (USD) on Wednesday. The USD/INR pair rises to near 88.23 ahead of the two-day Goods and Services Tax (GST) council meeting on Wednesday, aimed at reviewing the tax brackets from four to two.

On the eve of Independence Day on August 15, Indian Prime Minister Narendra Modi announced that the government will unveil new GST slabs to boost consumption around Deepawali, which will be celebrated on October 21.

According to a report from The Indian Express, the central government will abolish the 12% and 28% tax brackets and transfer these items to the remaining 5% and 18% brackets. Such a scenario will be inflationary for the Indian economy and may restrict the Reserve Bank of India (RBI) from reducing interest rates in the short term.

Meanwhile, India's Commerce Minister, Piyush Goyal, expressed confidence in his speech at an industry chamber event on Tuesday that New Delhi will close a tariff deal with the United States (USA). "We are in dialogue with the US for a bilateral trade agreement," Goyal said, as reported by The Economic Times. Goyal added that India is securing new trade agreements with countries such as the European Union (EU), Chile, Peru, New Zealand, Australia, Oman, and has already concluded agreements with the EFTA bloc, the United Kingdom, and the United Arab Emirates.

A slightly positive comment from Indian Commerce Minister Goyal about the trade deal with the US came at a time when President Trump has criticized New Delhi for making "one-sided deals" with Washington for a long time.

On Tuesday, US President Trump criticized India again while speaking to reporters in the Oval Office. "We get along well with India, but for many years, it has been a one-sided relationship. India has been charging us tremendous tariffs, the highest in the world," Trump said, as reported by the Hindustan Times.

Market Movers: US Dollar Trades Firmly Ahead of US JOLTS Job Openings Data

• A slight upward movement in the USD/INR pair is also driven by the strength of the Dollar. At the time of writing, the Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, has risen to near 98.50.
• The US Dollar is trading firmly as its demand as a safe-haven asset has increased, following the market's risk aversion sentiment due to rising long-term bond yields worldwide.
• A significant increase in long-term bond yields indicates growing investor concerns about government debt. Rising government borrowing costs often lead to a reduction in social spending, thereby increasing the appeal for safe investments.
• Domestically, the US appeals court's decision against President Donald Trump's tariffs, citing many of them as "illegal", led to a sharp decline in Wall Street indexes. US tech stocks fell after a prolonged weekend on Tuesday, after the court ruled against Trump's tariffs, stating that Trump had wrongly invoked the emergency law.
• Meanwhile, U.S. President Trump announced that he will take the case to the Supreme Court for an expedited decision on tariffs.
• On the economic front, investors are awaiting the Non-Farm Payroll data (NFP) for August, which will be released on Friday. Investors will pay close attention to the NFP data, as the July report heightened market expectations for interest rate cuts by the Federal Reserve (Fed) for the September meeting.
• According to the CME FedWatch tool, there is nearly a 92% chance that the Fed will cut interest rates at the September policy meeting.
• In Wednesday's session, investors will focus on the JOLTS Job Openings data for July, which will be released at 14:00 GMT. The report is expected to show that US employers announced 7.4 million new job openings, nearly in line with the previous reading of 7.44 million.

Technical Analysis: USD/INR consolidates above 88.00

The USD/INR pair generally moves sideways after recording a new all-time high around 88.50 on Monday. The short-term trend of the pair remains bullish, as it stays above the 20-day Exponential Moving Average (EMA), which trades near 87.69.

The 14-day Relative Strength Index (RSI) stabilizes above 60.00, suggesting that a new upward momentum has come into effect.

Looking down, the 20-day EMA will act as a key support for the pair. In the upward direction, the pair has entered unexplored territory. The round mark of 89.00 would be the key obstacle for the pair.

Frequently Asked Questions about the Indian Rupee

What are the main factors driving the Indian Rupee?

The Indian Rupee (INR) is one of the currencies most sensitive 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. The direct intervention of the Reserve Bank of India (RBI) in the foreign exchange markets to maintain a stable exchange rate, as well as the level of interest rates set by the RBI, are other important factors that influence 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 the foreign exchange markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to keep the inflation rate at its target of 4% by adjusting interest rates. Higher interest rates generally strengthen the Rupee. This is due to the role of 'carry trade', in which investors borrow in countries with lower interest rates to place their money in countries that offer relatively higher interest rates and profit from the difference.

What macroeconomic factors influence the value of the Indian Rupee?

The macroeconomic factors that influence the value of the Rupee include inflation, interest rates, economic growth rate (GDP), trade balance, and foreign investment flows. A higher growth rate can lead to more foreign investments, increasing demand for the Rupee. A less negative trade balance will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates minus inflation), are also positive for the Rupee. A risk-on environment can lead to greater Direct and Indirect Foreign Investment (FDI and FII), which also benefits the Rupee.

How does inflation impact the Indian Rupee?

Higher inflation, particularly if it is comparatively greater than that of India's peers, is generally negative for the currency, as it reflects depreciation through excessive supply. Inflation also increases the cost of exports, leading to more Rupees being sold to buy foreign imports, which is negative for the Rupee. At the same time, higher inflation generally leads the Reserve Bank of India (RBI) to raise interest rates, which can be positive for the Rupee due to increased demand from international investors. The opposite effect is true for lower inflation.