• The Indian rupee weakens against the US dollar at the opening ahead of a two-day meeting of the GST council.
• The Indian Commerce Minister, Goyal, confirmed that New Delhi is in talks with Washington regarding a trade agreement.
• A strong increase in long-term bond yields worldwide boosts the demand for safe assets.

The Indian rupee (INR) opens slightly lower against the US dollar (USD) on Wednesday. The USD/INR pair rises to around 88.23 ahead of the two-day Goods and Services Tax (GST) council meeting on Wednesday, aimed at reviewing the tax categories from four to two.

On the eve of Independence Day on August 15, Indian Prime Minister Narendra Modi announced that the government will reveal new categories of GST to boost consumption around Diwali, which will be celebrated on October 21.

According to a report by The Indian Express, the central government will abolish the 12% and 28% categories, and move these items to the remaining 5% and 18% categories. Such a scenario would be inflationary for the Indian economy and could limit the Reserve Bank of India (RBI) in reducing interest rates in the short term.

Meanwhile, India's Commerce Minister, Piyush Goyal, expressed confidence in his speech at an industry chamber event on Tuesday that New Delhi will close a tariff agreement with the United States (USA). “We are in dialogue with the USA for a bilateral trade agreement,” Goyal said, according to The Economic Times. Goyal added that India is securing new trade agreements with countries such as the European Union (EU), Chile, Peru, New Zealand, Australia, Oman, and has already concluded agreements with the EFTA bloc, the United Kingdom, and the United Arab Emirates.

A slightly positive comment from Indian Commerce Minister Goyal about the trade agreement with the U.S. has come at a time when President Trump has been criticizing New Delhi for engaging in “unilateral business” with Washington for a long time.

On Tuesday, U.S. President Trump once again criticized India while speaking to reporters in the Oval Office. “We get along very well with India, but for many years, it was a one-sided relationship. India was charging us tremendous tariffs, the highest in the world,” Trump said, according to Hindustan Times.

Daily summary of the factors driving the market: The U.S. dollar remains strong ahead of the U.S. JOLTS job openings data.

• A slight upward movement in the USD/INR pair is also driven by the strength of the US dollar. At the time of writing, the Dollar Index (DXY), which tracks the value of the dollar against six major currencies, rose to nearly 98.50.
• The US dollar remains strong as its demand as a safe-haven asset has increased, following the market's risk aversion sentiment due to rising long-term bond yields worldwide.
• A significant increase in long-term bond yields indicates growing investor concerns about government debt. The rising borrowing costs for the government often lead to a decrease in social spending, thereby increasing the appeal of safe-haven bets.
• At the national level, the U.S. Court of Appeals' ruling against President Trump's tariffs, citing many of them as “illegal,” has led to a sharp decline in Wall Street indices. U.S. technology stocks plummeted after an extended weekend on Tuesday following the court's ruling against Trump's tariffs, stating that Trump wrongly invoked the emergency law.
• Meanwhile, President Trump has announced that he will take the case to the Supreme Court to obtain an expedited ruling on the tariffs.
• On the economic front, investors are awaiting the August non-farm payroll data (NFP), which will be released on Friday. Investors will pay close attention to the NFP data, as the July report heightened market expectations for interest rate cuts by the Federal Reserve (Fed) for the September meeting.
• According to the CME FedWatch tool, there is almost a 92% probability that the Fed will cut interest rates at the September policy meeting.
• In Wednesday's session, investors will focus on the July JOLTS job openings data, which will be released at 14:00 GMT. The report is expected to show that U.S. employers posted 7.4 million new jobs, nearly in line with the previous reading of 7.44 million.

Technical Analysis: USD/INR consolidates above 88.00

The USD/INR pair is generally moving sideways after hitting a new all-time high of around 88.50 on Monday. The short-term trend of the pair remains bullish as it stays above the 20-day Exponential Moving Average (EMA), which is trading near 87.69.

The 14-day Relative Strength Index (RSI) stabilizes above 60.00, suggesting that a new bullish momentum has come into effect.

Looking down, the 20-day EMA will act as a key support for the pair. On the bullish side, the pair has entered unexplored territory. The round figure of 89.00 would be the key hurdle for the pair.

Frequently Asked Questions about the Indian Rupee

What are the key factors driving the Indian rupee?

The Indian rupee (INR) is one of the most sensitive currencies to external factors. The price of crude oil (the country largely depends on imported oil), the value of the US dollar - most trade is conducted in USD - and the level of foreign investment, all of which are influential. The direct intervention of the Reserve Bank of India (RBI) in the foreign exchange markets to maintain a stable exchange rate, as well as the level of interest rates set by the RBI, are other important factors influencing the rupee.

How do the decisions of the Reserve Bank of India impact the Indian rupee?

The Reserve Bank of India (RBI) actively intervenes in the foreign exchange markets to maintain a stable exchange rate, to help facilitate trade. Additionally, the RBI seeks to keep inflation at its target of 4% by adjusting interest rates. Higher interest rates generally strengthen the rupee. This is due to the role of the “carry trade” where investors borrow in countries with lower interest rates to place their money in countries that offer relatively higher interest rates and benefit from the difference.

What macroeconomic factors influence the value of the Indian rupee?

The macroeconomic factors influencing the value of the rupee include inflation, interest rates, the economic growth rate (GDP), the trade balance, and foreign investment inflows. A higher growth rate may lead to more foreign investment, increasing the demand for the rupee. A less negative trade balance 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 appetite environment may lead to higher inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefits the rupee.

How does inflation affect the Indian rupee?

Higher inflation, particularly if it is comparatively higher than that of 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 negative for the rupee. At the same time, higher inflation generally leads the Reserve Bank of India (RBI) to raise interest rates, and this can be positive for the rupee due to increased demand from international investors. The opposite effect is true for lower inflation.