USD/INR declines as Indian PM Modi vows a wave of GST reforms to boost consumption
- Indian Rupee opens strongly against US Dollar on backdrop of Indian PM Modi’s promise to reform GST structure.
- The Indian Union Finance Ministry’s blueprint indicates that there will be only two GST slabs.
- Investors await Trump-Zelenskyy meeting at the White House on Monday.
The Indian Rupee (INR) opens on a positive note against the US Dollar (USD) on Monday after an extended weekend due to a holiday on Friday on account of Independence Day. The USD/INR pair as the Indian Rupee has strengthened, following the announcement by India’s Prime Minister (PM) Narendra Modi, while raising the Indian Flag on the eve of Independence Day, that the government will bring “next generation Goods and Services Tax (GST) reforms” to boost domestic consumption.
While praising India’s decadal-long journey in achieving self-reliance and transformation, and highlighting achievements of GST, Indian PM Modi vowed to bring a wave of reforms in the taxation system to ease the burden on middle-class households and boost demand, which will come by Diwali this year.
Soon after Indian PM Modi’s announcement of tax reforms, the Union Finance Ministry released a blueprint that aims to simplify the GST structure by narrowing four tax slabs to two. According to the blueprint, two tax slabs 12% and 28% will be scrapped, and items in these brackets would move to the remaining labels of 5% and 18%.
This comes at a time when trade tensions between the United States (US) and India have heated up as the former has raised tariffs on imports from New Delhi for buying Oil from Russia. Additionally, Washington has postponed trade talks with New Delhi, which were scheduled for Aug 25-29 in India.
Lower burden of taxes on Indian households could prove to a major stroke to boost consumption – a move that could prompt inflationary pressures, which have been softened significantly in past few months. In July, India’s retail Consumer Price Index (CPI) came in at 1.55% on year, the lowest level seen since June 2017.
Meanwhile, Indian stock markets have opened on a gap-up note on the announcement of taxation reforms. Nifty50 is up 1.5% near the psychological level of 25,000, the highest level seen this month.
Daily digest market movers: Indian Rupee gains against US Dollar
- Globally, investors await US President Donald Trump’s meeting with European Union (EU) leaders and Ukrainian President Volodymyr Zelenskiy at the White House to discuss ending the war in Ukraine. This came after a summit in Alaska over the weekend in which Trump and Russian leader Vladimir Putin discussed a peace agreement between Moscow and Kyiv.
- Ahead of the Trump-Zelenskyy meeting, the US President has urged Kyiv to make a deal with Russia. Trump told Ukrainian President Volodymyr Zelenskiy that Putin had offered to freeze most front lines if Kyiv ceded all of Donetsk, the industrial region that is one of Moscow’s main targets, Reuters reported.
- Signs of a Russia-Ukraine trade truce would be favorable for the Indian Rupee as US President Trump could roll back penalty tariffs imposed on New Delhi for buying Russian Oil.
- Meanwhile, the upside move in the USD/INR pair is also driven by weakness in the US Dollar. The US Dollar. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades cautiously near an almost three-week low of around 97.86. The US Dollar faces selling pressure as traders have remained confident that the Federal Reserve (Fed) could reduce interest rates in the September monetary policy meeting.
- According to the CME FedWatch tool, the probability of the Fed cutting interest rates in September is 82.6%.
- Traders have backed the Fed’s interest rate cuts in September due to cooling labor market conditions. However, the fresh lot of the US CPI and Producer Price Index (PPI) showed mixed responses. The US PPI report signaled that firms have started passing the tariff effect to consumers, while its impact remained absent in the consumer inflation data.
- On Friday, the comments from Chicago Fed Bank President Austan Goolsbee, in an interview with CNBC, signaled that he wants to see one more supporting inflation data to get reassured before backing interest rate cuts in September. "I feel like we still need another one at least to figure out if we’re still on the golden path”, Goolsbee said.
- This week, investors will pay close attention to Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium to get fresh cues about whether the US central bank will cut interest rates next month.
Technical Analysis: USD/INR slumps to near 87.60
USD/INR opens lower around 87.60 on Monday after an extended weekend, the lowest level seen in over a week. However, the near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 87.35.
The 14-day Relative Strength Index (RSI) falls slightly below 60.00. A fresh bullish momentum could emerge if the RSI returns above that level.
Looking down, the 20-day EMA will act as key support for the major. On the upside, the August 5 high around 88.25 will be a critical hurdle for the pair.
Indian Rupee FAQs
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.
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.
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.
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.