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The rupee was in a somnolent state over the past week, restricting itself to a dull sideways range. The fact that many of the participants were away on New Year holiday could partly account for this condition in the foreign exchange market. Foreign institutional investors too have reduced their activity in the equity markets since December 31, 2007 giving a respite to the rupee.

The dollar strengthened to 1-month high against the euro and the yen as investors cheered the proposed stimulus package of the US President-elect, Mr Barack Obama that included $310 billion in tax cuts. The dollar index, traded on Intercontinental Exchange, strengthened to 84 on Monday. This index needs to rally above 85 to signal that the medium term downtrend has ended. High crude prices, nearing the $50 per billion barrel mark, would exert some downward pressure on the rupee in the days ahead.

The rupee is stuck in the range between 48 and 49 against the dollar. The range is getting narrower implying that a break-out is imminent shortly. The short-term trend in the currency is down since the recent trough is at Rs 46.8. As explained in our previous column, there is a strong support around Rs 49 that is currently arresting the rupee decline. If this support is breached, the Indian currency unit can head towards 49.6 or 50.5.

Key short-term resistance is present at Rs 47.4. The currency needs to appreciate above this level to signal that the short-term trend is turning up.

There is no alteration in the medium-term outlook for the rupee. It can stay confined within the wide trading band between 46.4 and 50.5 for a few more weeks. Rally beyond 46 can cause the currency to appreciate to 45 or even 43.

On the other hand, if the appreciation does not go beyond 46, it would imply that the current sideways move is a consolidation phase in the downtrend that commenced in January 2008 and the resumption of this move will take the currency below 50 again.

Supports – 49.2, 49.6, 50.5

Resistances – 47.4, 46.4, 46.4

Lokeshwarri S K

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