The Hindu Business Line : Sharp depreciation in rupee

The month-end demand from oil importers and the strength in the US dollar ahead of the Federal Open Market Committee (FOMC) statement on Wednesday had a greater impact on the rupee than the 25 bps hike in the cash reserve ratio by the Reserve Bank of India on Tuesday.

The currency depreciated steadily in the last five trading sessions as demand from importers and lack of supply beyond Rs 40.1, made the currency record a 1-month low at Rs 40.65 on Wednesday. Net FII outflow of $155 million in equity and debt in the month of April also aided the currency’s weakness. Dollar strengthened on the expectation that the Federal Reserve’s rate cutting cycle could be nearing an end.

1-month view

The rupee appreciation was stemmed at Rs 39.6 over the past month, probably due to the concerns regarding the effect of rupee appreciation on current account deficit. This aided in the formation of a base between Rs 39.6 and Rs 40 in the dollar-rupee pair from where they appear to have launched a fresh up-move.

Since the currency pair has now moved beyond Rs 40.3, it is likely that the third leg (upward) of the move that commenced at Rs 39.02 (January 17) is currently in motion. The targets as per this count are Rs 40.71 and then Rs 41.4.

If we consider the retracement of the down-move that commenced from July 2006, 30 per cent retracement is at Rs 41.4. The convergence of counts at Rs 41.4 makes it a potent medium term target. The medium term view will turn negative if the currency pair declines below Rs 40 again.

5-day view

The currency pair has immediate resistance in the zone around Rs 40.6. If this level is surpassed, a move towards the former peak at Rs 40.83 would be on the cards. Some caution also needs to be exercised in the resistance zone between Rs 40.8 and 40.9.

Since the range for the rupee movement has enlarged considerably over the past 5 sessions, the near term trend deciding level is considerably lower at Rs 40.05. In other words, the positive near term outlook will be negated only if the currency pair closes below Rs 40.05.

Lokeshwarri S.K.

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