The Hindu Business Line : Rupee negative in near-term

The mayhem in the equity markets, tightening credit and the rupee soaring above 47 against the dollar prompted the Reserve Bank of India to cut the credit reserve ratio by 50 basis points on Monday and the Securities and Exchanges Board of India reversed the restrictions imposed on offshore derivative instruments.

While RBI’s action would not affect the forex markets much, SEBI’s move appears to have been directed at stemming the outflow of funds from the stock markets in order to support the rupee.

The moot question is whether the ploy would work given the fact that global investors are currently de-leveraging resulting in an exodus of funds from most asset classes. Strength in US dollar too would exert pressure on the rupee. Dollar index on ICE recovered smartly to move past the recent peak at 80 last week. The index now appears headed towards 84 and then to 90. Some relief will however be provided to the rupee by easing commodity prices.

1-month view

The short-term appreciation in rupee halted at 46.02 last Friday spurred by the sharp decline in equity prices. The gradient of the decline since the second week of August is characteristic of third waves, that are extremely swift and devastating. The targets of the third leg of the down move from the 39.02 peak are 46.18 and then 48.94.

Since the rupee has moved well past the 48 mark, the next support on the chart is at the May 2002 trough at 49. This level is likely to provide strong support to our currency as it has remained unchallenged over the last six-years. As explained in our earlier column, we are expecting a move between 36 and 49 over the long-term. This view would have to be altered if there is a monthly close below 49.

5-day view

Rupee moved firmly beyond our short term support at 47.2 to record a new trough at 48.15 on Tuesday. The decline could continue in the near term to take the currency to 48.36 or 48.94. The near-term outlook will remain negative as long as the currency trades below 47. A close above 47 is needed to signal that the rupee is on the road to recovery.

Resistances for the week would be at 47, 46.3 and then 45.1.

Supports – 48.1, 48.3, 48.9

Resistances – 47, 46.3, 45.9

Lokeshwarri S. K.

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