The USD/INR is trading at 62.30 after the Rupee gained on the USD. The U.S. dollar has been gaining against major pairs after the the Federal Open Market Committee (FOMC) statement tripped the currency. Federal Reserve Chair Janet Yellen undid some of the damage with her speech on Friday. European data has deflated the EUR/USD and given the USD the traction it had lost.
India continues to impress as it has gained accolades from economic think thanks and international organizations alike. The Asian Development Bank is the latest to expect 8.2 percent growth in 2015. The Indian government is only forecasting a 7.4 percent growth in the same period. Prime Minister Modi has struggled with structural reforms, but has earned the market’s confidence that he will advocate to attract investment inflows.
The cooperation between the Reserve Bank of India and the Indian government has yielded results as the twin deficits have been better managed that in the past and that has resulted in the stability needed going forward. Inflation has been low thanks to low energy prices. Non-oil producers such as India have taken advantage of low crude prices to build inventory and increase production without increasing costs.
The expectation surrounding the impending U.S. interest rate raise from the Federal reserve has driven the Rupee higher. The pair started the month of March at 61.90 but the optimism surrounding higher U.S. rates drove the pair close to the 63.00 price level. Post FOMC saw a depreciation to 62.10 before Yellen’s “New normal for Monetary Policy” speech that reassured the market that the word ‘patient’ meant a rate hike in the near future.
Strong emphasis on data dependency from the Fed gives even more attention to the influential employment report released on Friday. The NFP has revealed month after month a solid employment recovery. Some cracks have appeared in the form of slower wage growth, but the headline unemployment rate and other components show a jobs picture that has overcome most of the losses from the credit crisis. The NFP has been the positive outlier on an otherwise softer U.S. economic data release.
Even when the headline number has beat expectations and the unemployment rate has hit pre-crisis lows, the market has been well trained by the Fed to look deep into the details. Wage growth in particular will be in focus, as analysts scour the report for signs that corporations have hired more but also are paying more. The dovish FOMC took the air of the USD rally’s wings, but a strong NFP could put pressure on the Fed’s decision to start raising rates regardless of what other indicators have signalled during the week.
Interest-rate divergence will continue to drive the USD/INR. Positive forecasts on the Indian economy have made the Rupee resilient at current levels, but if the U.S. continues to grow at the current pace it can further depreciate the Rupee. Further interest rate cuts are expected from the RBI, at least 50 basis points this year, which puts the USD in a good position to trade upwards as the difference between the two interest rates will narrow making rupee investments less attractive.