Over the past fortnight, the rupee ceded 1.35 per cent against the dollar to close at 55.12. The feel-good factor of the Prime Minister’s positive statements after he took over as the Finance Minister wore out quickly. Worries about the global economy took precedence and investors turned to the safety of the dollar. This along with the absence of further quantitative easing by the US Fed helped the greenback gain sharply. The dollar index rose 1.6 per cent over the fortnight to trade at 83.08.

The euro was weighed down by continued uncertainty about the debt crisis and lost 2.57 per cent against the dollar. A euro now yields 1.23 dollars. The rupee too gained against the euro and was up 1.11 per cent over the past two weeks to close at 67.71.

Mixed bag

On the domestic front, it was a mixed bag. While headline inflation for June moderated to 7.25 per cent, food inflation continued to remain high at 10.81 per cent. This reduces the chances of the RBI cutting rates in the impending monetary policy. After declining over the past two months, industrial growth in May grew but at a tepid 2.4 per cent. June exports fell 5.5 per cent but imports shrunk by a higher 13.5 per cent. This narrowed the trade deficit to its lowest level in 15 months. Fears of a poor monsoon though dampened sentiment. Despite FIIs turning net buyers, the market weakened over the fortnight with the Sensex losing 1.8 per cent. A panel has been set up to review the much-feared GAAR provisions. This improved sentiment in favour of the rupee. But more important in the near-term will be the RBI’s monetary policy announcement on July 31.

Rupee outlook

The rupee did not weaken below 56 against the dollar indicating that the short-term uptrend that began from the trough of 57.3 continues to be in force. The targets for the third wave down from this peak are 54 and then 52.8. The recent peak at 54.1 will also continue to arrest the currency’s rallies in the short term. Medium-term resistance for the currency stays at 53.9. The outlook will turn positive only on strong close above this level. Inability to move beyond this level will result in the currency fluctuating in the range between 54 and 57 for few more months. We maintain a long-term target on close below 57.3 at 57.9.

USD-INR future

This contract moved downwards gradually to the low of 54.8. The contract faces short-term resistance at 56.2. Traders can continue to sell in rallies as long as the contract trades below this level. Downward targets are 54.4 and 53.7.

(This article was published on July 17, 2012)
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