The Indian Rupee (INR) showed strength on Monday, bolstered by rising domestic equities and a fresh inflow of foreign funds. The US Dollar (USD) inflows also help mitigate the decline in other Asian currencies.

Recent data revealed that the HSBC India Manufacturing Purchasing Managers Index (PMI) increased to 57.6 in March, while the Services PMI dropped to 57.7. The Composite PMI decreased to 58.6, showcasing a mixed reaction in the local currency.

Rising Crude Oil prices, influenced by geopolitical tensions in the Middle East, may adversely affect the INR, as India is a major oil consumer. Forex traders noted that Foreign Portfolio Investors (FPI) have resumed net buying in equity and debt markets.

The USD-INR trading range is projected between 86.00 and 86.80 in the near term. The outlook for the pair may shift if it crosses below the 100-day Exponential Moving Average, with the 14-day Relative Strength Index at 32.70 suggesting potential for further decline.

If the USD/INR surpasses 86.48, it may head towards 87.00 or 87.38. Conversely, a breach of 85.97 could result in a drop to 85.60 or even lower to 84.84.

India has seen an average growth rate of 6.13% from 2006 to 2023, attracting significant foreign investments. The high import dependency on oil amplifies the impact of oil price fluctuations on the INR, as higher prices increase USD demand.

Inflation affects the Rupee by influencing interest rates set by the Reserve Bank of India (RBI). While high inflation may depreciate the Rupee, rising interest rates can attract foreign investment, enhancing its value.

India typically runs a trade deficit, where imports outstrip exports, leading to increased USD demand during high import periods. Market volatility further exacerbates this demand, generally negatively influencing the Rupee’s value.

The Indian Rupee displayed resilience as domestic equities performed well and fresh foreign inflows provided support. The additional inflows of US Dollars helped counterbalance the weakness seen in other Asian currencies, which gave the Rupee a relative edge.

Recent economic figures showed a mixed reaction in the local currency. The HSBC India Manufacturing PMI advanced to 57.6 in March, highlighting a healthy expansion in the sector, while Services PMI experienced a mild decline to 57.7. The overall Composite PMI slipped to 58.6, indicating that while business activity remains robust, the pace has moderated slightly. These data points suggest that manufacturing outperformed services, though both remain in expansion.

Rising crude oil prices remain a concern. With India depending heavily on oil imports, the local currency faces pressure when prices climb, because more US Dollars are needed to procure raw materials. Tensions in the Middle East have contributed to crude’s rally, and unless there is a swift resolution, this could weigh on the Rupee in the coming sessions. However, market participants pointed out that foreign portfolio investors have turned into net buyers of Indian equities and bonds, which offsets some of the pressure from energy costs.

Looking ahead, USD-INR is expected to fluctuate between 86.00 and 86.80 based on prevailing market trends. However, technical indicators suggest the possibility of further moves. A drop below the 100-day Exponential Moving Average could alter the current structure, especially with the 14-day Relative Strength Index hovering at 32.70. This level suggests that the currency pair may be inclined toward further weakness, although confirmation would be required.

If USD-INR breaks past 86.48 on the upside, traders would anticipate moves towards 87.00 and 87.38 as potential resistance levels. On the other hand, if selling pressure intensifies and the pair falls below 85.97, support may emerge at 85.60, with an extended decline opening the door to 84.84.

India’s economic performance has remained strong, with an average growth rate of 6.13% over a 17-year span. This stability has lured foreign investors, but there are clear vulnerabilities that arise from the country’s reliance on imported energy. When oil prices rise, the demand for US Dollars increases, putting downward pressure on the local currency.

Inflation remains an element that cannot be ignored. The Reserve Bank of India responds to inflationary pressures through interest rate decisions, and these adjustments influence how the Rupee trades. When inflation accelerates, the Rupee weakens, but if higher interest rates are introduced to counter inflation, it can attract foreign capital, supporting the currency.

India routinely experiences a trade deficit, where imports surpass exports. During periods of increased import demand, the need for US Dollars rises further, adding strain on the Rupee. Volatility in the broader financial markets compounds this effect, making exchange rates more unpredictable.