Indian Rupee is a very interesting currency as it is the fiat currency of India, a country with one of the largest economies in the world. With the recent cognitive dissonance of India about its place and ties in international politics it is essential to analyze fundamental factors that can have an impact on Indian Rupee in the current year. Let’s define how we can predict the future of INR and then switch to charts to see potential entry and exit points.
Predicting the future
Predicting the future is difficult, but still possible to some degree to anticipate and predetermine scenarios that are likely to happen if there is enough data backing it. In the world of financial markets predicting the future is highly unlikely, but there are some ways to analyze fundamentals and conclude what possible scenarios may represent markets to traders and how traders can react to them. But fundamental analysis only won’t be enough and we will need to define entry points and stop loss and take profit orders for each scenario. Controlling risks and targeting potential rewards is impossible without using well-defined stop loss and taking profit. So we are going to analyze the Indian macroeconomic events and their potential impact on its fiat currency and then will try to make sense of its price charts and set proper zones for stop loss and take profits for each scenario.
Analyzing the fundamental factors that impact USD/INR
The main factors that can change the price dynamics of Indian currency are central bank interest rates, inflation, foreign investment, current account deficit, and GDP forecast.
Interest rates
Reserve Bank of India (RBI), the central banking institution of India controls the monetary policy of the Indian currency. The rate was increased to 6.5% with 25 basis points in February 2023. Generally increasing interest rates from central banks tend to strengthen the currency as it lowers the inflation rate. This metric is bullish for INR and should help the Indian currency hold its ground against the world reserve currency in the upcoming months of 2023.
Inflation
There is some good news regarding the inflation rates from India and it should be one of the main reasons why INR is holding its ground against USD in 2023. But this is different with EUR as the INR continues to be depreciated against the EUR. Indian Central banks tolerance level for consumer inflation is set to 6% and in March 2023 the inflation rate was at 5.66% below the bank’s red line for the first time in 2023. This is incredibly bullish for Indian currency and we could see a downtrend continuation for USD/INR and a slowdown of EUR/INR uptrend. But it is not enough to only consider inflation, without other factors weighing in it will be impossible to reliably predict a potential trend.
Foreign investment and Current account deficit
Although direct foreign investment has declined in 2023 when compared to 2022, it still is at a decent number and economists believe that in 2024 it will likely increase. Despite this number being bearish currently for the INR the future still seems bright. The FDI is a powerful macroeconomic indicator, but it still is less impactful than inflation and central bank rates.
Since the current account deficit in India has narrowed, which means that India is importing fewer goods and services than it is exporting. This could lead to a decrease in the demand for foreign currency, which could cause the value of the Indian rupee (INR) to appreciate. Overall the sentiment here too indicates that the Indian rupee is in healthy shape and should pick up a decent battle against USD. From the fundamentals above, INR has a bullish outlook for 2023, but let’s switch to charts and see what’s going on the technical side.
USD/INR technical insight
As we can see the overall fundamental outlook of USD/INR is predicting a downtrend for the pair as INR is gaining strength. Let’s see how charts resonate with these claims.
On a weekly chart of USD/INR, we can see that price is already moving downwards to test previous swing lows. After this test, we can see if it forms a channel by reversing upwards or breaking down previous lows. Since the weekly chart is a relatively higher time frame let’s see what the daily chart shows us. If the daily chart confirms the trend on the weekly chart then our prediction will be more accurate and could be used as a good indicator for the future price dynamics of the pair.
On a daily chart, the price action confirms the downward trend and is going to test lows. But it is not a good time for shorting the pair right now as the price could change direction as there is no strong zone nearby. The most important thing is to watch what the price does at 81 and 80.5 levels to see the possible course of action from the traders’ side.
Wrapping things up
It seems that Indian Rupee is showing strength against US Dollar in 2023, with bullish fundamentals indicating a potential downtrend for USD/INR. The Reserve Bank of India (RBI) has decided to increase the interest rate and fight inflation and this has had a positive impact on the currency’s strength. However, predicting the future of financial markets is always challenging, and it is crucial to analyze both fundamental and technical factors to make well-informed decisions. By looking at the charts we can see that price action confirms fundamentals and price is slowly approaching recent swing lows, these zones can be used for setting stop loss and take profit targets. Overall, it appears that Rupee in 2023 has a bullish outlook and traders could capitalize on opportunities from these developments.
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