The last couple of months of 2022 has been tough for the Indian Rupee. Starting from 2020, the USD/INR currency pair was traded between 77.2075 and 72.1427 levels. And in 2023, the pair is currently ranging from 80.4438 and 83.3229 levels. Can the Indian Rupee further deflate against the US Dollar? In order to make an educated prediction, we need to take a look at various aspects of the pair.
When making a currency pair prediction, it should be mentioned that a pair consists of two: quote and base currencies and both need to be analyzed accordingly. Traders use different methods for predicting future market valuations. The most common methods we can use are:
- Technical analysis: which involves studying past price and chart data to identify trends, support and resistance levels, and chart patterns. Trading indicators are also widely used in the analysis.
- Fundamental analysis: involves analyzing economic, financial, and political factors that may impact a currency pair valuation.
It should be noted that market analysis works best for larger time frames as there is less market noise.
Fundamental reasons give direction to the markets and prices move based on technical rules. And therefore, both analytical approaches are essential for conducting an extensive analysis.
Technical analysis of USD/INR
If we take a look at the daily chart of the USD/INR, we can see that the flag pattern is in formation. Some may even see the M formation pattern within the triangle. The flag pattern is bullish and therefore, if breakout happens, the price can jump as high as the height of the flagpole.
However, it should be emphasized that any pattern is considered complete when breakout happens. From the chart we can easily see that the 82.9500 area is a resistance level. If the price breaches and remains above the resistance level, the price of the USD/INR will be ranging between 82.9500 and 92.0000 levels.
However, if the breakout doesn’t occur, or price temporarily breaks the resistance and closes below the 82.9500 level, this could indicate a reversal. In this case, valuation of the USD/INR will be ranging between 82.9500 and 76.0000 levels.
In the USD/INR pair, the main driver of the price is the US dollar. The US dollar is a global currency that is largely used in global trade. It is estimated that more than 60% of all foreign reserves held by central banks are in US dollars. In addition, many commodities, such as oil, precious metals, and wheat are priced in US Dollar, which further cements its position as a global currency.
It’s impossible to conduct a technical analysis on USD/INR and not take into account the US dollar Index (DXY). DXY is a weighted average of the value of the US dollar relative to a basket of six major currencies. The currencies that make up the DXY are:
- Euro (EUR)
- Japanese Yen (JPY)
- British pound sterling (GBP)
- Canadian dollar (CAD)
- Swedish krona (SEK)
- Swiss franc (CHF)
Below you can see the DXY chart. On a daily chart, the “Head and Shoulders” pattern is easy to spot. If the price breaks the significance level around the 101.0250 level and remains below the level for a couple of days, it is more likely the price to further decrease throughout the year 2023. According to the Head and Shoulders pattern, in the case of breakout, price of the DXY can fall as low as the height of the pattern itself. If this prediction comes to life and DXY falls between 88.000 and 101.0250 levels, this will decrease the value of the USD/INR currency pair.
Fundamental analysis of USD/INR
As already mentioned, fundamental analysis involves analyzing economic financial and political events that may affect the currency pair valuation. In order to make an extensive prediction, we need to take a look at factors that influence both economies separately.
Fundamentals that impact the US Dollar
There are several major fundamental factors that impact the value of the US Dollar. Here are some of the most important ones:
- Economic data such as Gross Domestic Product (GDP), Inflation, and unemployment figures can impact the value of USD the most. In order to handle the challenges caused by the Covid-19 pandemic, the US Government took out huge loans that caused an increased inflation. In addition, Russia’s war in Ukraine triggered raising prices on commodities, housing and goods globally. It is difficult to say how many US Dollars have been printed since the pandemic. However, based on the Federal Reserve’s data, the central bank increased its assets by more than 4 trillion dollars since March 2020 (Start of the pandemic). In order to limit the impact of the high inflation on the public, the Federal Reserve (FED) has been increasing the interest rates. On March 17, 2022, the rates increased from 0.25% to 0.50%. Since then, the rates have been raising gradually. On March 2, 2023 the FED raised rates from 4.75% to 5.00%. High inflation is bad for the US Dollar. However, when the rates are increased, this means that interest for loans gets larger, and as a result, less people take out loans, less money gets printed and the currency becomes stronger. On the downside, less money for the public translates into less income for businesses, and consequently economic growth suffers. The FED’s policy is positive for the USD short term, but it damages the currency long term.
- Geopolitical events such as wars, political instability and trade disputes can impact the value of the US dollar. Russia’s war in Ukraine is costly not only in terms of human lives, but also in terms of money. The US government is the largest donor of financial, military and humanitarian aid to Ukraine. According to the Kiel Institute for the World Economy, the US has donated around 100 billion US dollars. The war puts additional pressure on the US dollar. In addition, it should be mentioned that there’s tensions between the US and China over Taiwan. Any escalation in that field will be damaging to the US Dollar.
Overall, the US dollar will be in a tough spot throughout 2023. The main reasons are high inflation and high interest rates, war in Ukraine, increased commodity prices and tensions with China.
Fundamentals that impact Indian Rupee
Indian Rupee is a local currency and its value is largely dependent on the economic and political stability of India. There are various factors that influence the value of INR, including:
- Inflation: India is experiencing inflation similarly to most countries around the world. High inflation can reduce the purchasing power of the Rupee making it less valuable in comparison to other countries. To fight global inflation, the Indian central bank has been increasing interest rates as well, however, the increase is not as dramatic as the FED’s case.
- Prices on major commodities: Population of the Republic of India is over 1.4 billion. According to some estimates, India is set to surpass China as the world’s most populous country by April, 2023. Increased population has higher demand for energy. It should be mentioned that globally inflated prices on oil have not been a major issue for the Indian economy. India has maintained its relationship with Russia since the war in Ukraine. Russia is one of the most significant trading partners of India. India has been diversifying its oil imports to reduce its dependency on the Middle East, where geopolitical tensions cause threat to the energy security of India. Russia has become an increasingly important supplier of oil to India, and in recent years, the two countries have strengthened their ties. When most countries pay a high price for oil, India gets a significant discount from Russia. Russia struggles to find countries that will buy its energy and natural resources globally, and is ready to offer discounted prices. India gets reputational damage globally, however, in its defense, Indian politicians say that by purchasing oil from Russia, global demand on energy reduces.
- Demographics: As already mentioned, the Indian population is increasing in numbers and is likely to surpass China’s in 2023. This could mean that investors interested in a cheap and young labor force will be investing even more in India through 2023. On the other hand, we are witnessing robots taking more human jobs globally, and dethroning China as the world’s top manufacturer will not be an easy task for India. China has already built infrastructure and trading routes to stay on top of its competitors.
Overall, India is experiencing global inflation, but the effects are not as severe as it buys discounted oil from Russia. Growing demographics could attract more foreign direct investment (FDI) to the country. We can safely say that fundamentals for the Indian Rupee are promising.
There are two main approaches to predict the value of USD/INR throughout 2023. According to technical analysis, the pair can remain in an uptrend if the significant level is breached. In this case, the price of the USD/INR will be ranging between 82.9500 and 92.0000 levels. On the other hand, the US Dollar Index might complete the “head and shoulders” pattern, which will drive the USD/INR currency downwards.
On the fundamental analysis front, USD is facing more challenges than the Indian Rupee. High inflation and high interest rates could cause recession. The war in Ukraine is costly not only in terms of human lives, but also in terms of finances. The USA is the biggest contributor of humanitarian aid, finances, and weapons to aid Ukraine defend itself. On the other end, India is enjoying cheap oil from Russia.
Overall, if we take into account both technical and fundamental analysis, Indian Rupee is likely to get stronger against the US Dollar. The price is likely to range between 83.0000 and 75.000 through 2023.