On Wednesday, the Indian Rupee (INR) weakened slightly against the US dollar (USD), primarily due to increased demand for the greenback from importers. Market speculation that the Federal Reserve may delay interest rate cuts has further pushed demand for the USD higher. However, the INR’s decline was somewhat mitigated by positive signals that India’s economic outlook is improving.
India’s business activity strengthens in April
Despite the INR’s softer performance, optimism surrounding India’s economic outlook has helped support the currency from weakening further. Recent economic releases suggest the economy is increasingly growing robust, buoyed by encouraging business activity and strong demand. A survey released on Tuesday highlighted a significant expansion in India’s business activity in April, which has reached its highest level in nearly 14 years. This growth momentum places India as a frontrunner among major economies, with expansion expected to continue in the coming quarters.
Additionally, the latest data from the HSBC Manufacturing Purchasing Managers Index (PMI) underscored India’s resilience, with both the manufacturing and service sectors exhibiting robust performance. Increased new orders contributed to the highest composite output index since June 2010, according to Pranjul Bhandari, HSBC’s chief India economist.
INR/USD: Economic releases to look out for
Investor attention remains focused on key economic data releases, particularly in the United States. After the release of the US March Durable Goods Orders on Wednesday, market participants are waiting for the release of the preliminary Gross Domestic Product (GDP) annualised figure for the first quarter. The GDP rate is projected to come in at 2.5% in Q1. Additionally, Friday’s final reading of the US March Personal Consumption Expenditures Price Index (PCE) is expected to attract significant interest.
Reserve Bank of India keeps rates unchanged
The Indian central bank’s key interest rate was kept unchanged for the seventh policy meeting in a row on the 5th of April, as economic growth is expected to remain strong while inflation will stay above the 4% target. RBI governor Shaktikanta Das emphasised strong growth driven by an improvement in manufacturing and investment as reasons to keep interest rates on hold. India’s central bank wants to bring inflation to its desired 4% target by focusing on supply-side shocks, geopolitical tensions, and market volatility.
Challenges ahead
Apart from the positive economic outlook, the INR also found support after the decline in oil prices as the fear of a wider Middle East conflict has faded. But, despite the upbeat data, the INR continues to grapple with challenges in the forex market. Some analysts believe that the rupee’s relief is temporary and that the hawkish repricing of US Federal Reserve rate cut expectations will continue to support the greenback.
Meanwhile, in the US market, the S&P Global Manufacturing PMI declined, falling short of expectations, while the Services PMI also showed a modest drop. However, US New Home Sales increased in March, reaching their highest level since September.
In the near term, the INR may face challenges amid USD demand, but the overall positive economic sentiment in India could act as a stabilising force.