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The Indian currency took five-and-half years to appreciate from 49 to 39 between May 2002 and January 2008. But it took just nine months to retrace 70 per cent of this move as the rupee closed near the 47-mark on Tuesday. The currency is down 20 per cent from its January lows and the latest leg of the decline was caused by the mayhem in the equity market due to the debacle of the two Wall Street firms, Lehman Brothers and Merrill Lynch.

The downward reversal in the US dollar did nothing to assuage the sentiment in the rupee. US dollar index reversed on September 12 after recording a peak at 80.5 with a bearish engulfing pattern and followed it up with a plunge to 77.6 on Monday. However, the near-term outlook for dollar remains positive as long as it holds above 76. Rupee weakness in the Non Deliverable Forward (NDF) market, aided the Indian currency’s decline; one month forwards in the NDF market were quoting at 47.14 on Tuesday.

It is now apparent that the rupee is charting the second leg or the B wave of the long term correction that began in May 2002. A good place where this leg could have halted is at 45.2 that is 61.8 per cent retracement of the prior move. Since this level has been breached emphatically, a move towards the 49 peak becomes a distinct possibility, though it can take more than a month to do so.

If we consider the target of the third wave from the 39 trough, 1:1 extrapolation gave us the target at 46.2. If the current momentum continues and the currency continues plunging at this scorching pace, the next target is at 48.9.

It however needs to be added that the oscillators in the monthly charts are extremely oversold. The inference is that the current pace is unsustainable. Though the decline could continue for some more time, a steep and sharp appreciation could ensue once this decline ends.

Fear of capital outflows made the rupee depreciate more than 2.6 per cent in the last two trading sessions. The immediate support for the currency is at the trough at 47.04 formed in July 2006. However, the momentum generated by the decline over the last two sessions can take the currency to 47.8 in the near term.

Near term resistances are at 45.9 and then 45.2. The near term outlook will stay under pressure as long as the rupee remains below the first resistance.

Supports – 47.05, 47.8, 48.05

Resistances – 45.5, 45, 44.4

Lokeshwarri S. K.

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