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The $5.5 billion decline in the foreign exchange reserves for the week ended August 8 appears to have jolted the Reserve Bank of India in to inaction. To put this figure in perspective, the decrease in forex reserves since April 1 this year is just $9.7 billion. The rupee, thus unhindered, slipped past the 43.5 mark to the trough at 43.66 on Monday.

The rupee weakness was primarily caused by the demand for dollars from importers who wanted to take advantage of the sharp slide in commodity prices, including crude. The cessation of the open market operations by the RBI in oil bonds resulted in the pressure re-building on the rupee.

Strength in the US dollar has been the other factor affecting the Indian currency. The US dollar index on Intercontinental Exchange (ICE), that tracks the movement of the dollar against a basket of currencies, is pausing close to the resistance at $77.9, indicated in this column last week. The medium term targets for this index are 77.6 and then 79.6. A pause and consolidation at these levels is possible before a move higher.

The sharp decline (exceeding 4 per cent) since August 11 emphasises that the path of least resistance continues to be downward for the rupee. This move could be the final leg of the decline that commenced from the January peak at 39.02. This wave has the outer target at 43.99.

If we consider the entire appreciation from the May 2002 trough at 49.07, 50 per cent retracement occurs at 44 and 61.8 per cent retracement at 45.26. These are the medium term targets we will have to work with if the rupee sustains below 43.5 over the next couple of weeks. A reversal from 44 would mean that the currency would vacillate in the broad range between 42 and 44 for a few more months.

The rupee is pausing just below the key support at 43.5. The current decline could continue in the near term to take the currency to 43.9 or 44. As explained above, there is a key medium term support at 44 that can halt the decline in the near term. If this level is breached, the next target would be 44.6.

The presence of long-term moving average lines between 42.4 and 42.7 will provide resistance in the near term. A close above 42.4 is needed to make the short-term outlook positive again.

Supports – 43.6, 44, 44.6

Resistances – 42.9, 42.7, 42.4

Lokeshwarri S.K.

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