Finally, the rupee has seen a reversal, gaining 5.7 per cent in the past week to close at 63.84 on Tuesday.
The trigger for this rally came from Reserve Bank of India Governor Raghuram Rajan announcing steps to stabilise the rupee. Measures such as increasing the limit for exporters and importers to re-book forward contracts, opening a window for banks to swap the deposits raised from FCNR (B) with the RBI for a charge of 3.5 per cent per annum and allowing banks to borrow overseas up to 100 per cent of their Tier-1 capital caused a dramatic reversal that was further aided by short-covering of positions held by traders. The trade data showing August deficit dropping to $10.9 billion from $12.3 billion in July also gave a leg-up to the the rupee.
Expectation that the Syrian crisis might not develop into a full-fledged war and weak non-farm payroll data in the US raising hopes that the tapering of quantitative easing might be lower than expectation also helped boost the rupee.
Foreign institutional investors were net buyers in the past week. They bought $91.6 million in debt and $267.9 million in equity.
The dollar index, after testing our initial target of 82.50 fell back sharply last Friday. It has resistance near 82.40 and can fall to 81-80.8 in the coming week. The euro has reversed from just above 1.31. However, with resistance near 1.33, it is still vulnerable to test 1.30-1.28.
Contrary to our expectations, the rupee has strengthened, breaking its resistance at 65 last week, a level which will now turn into a support. The short-term outlook is bullish for the rupee. However, there is immediate resistance at 63.77 which has held on Tuesday. But the chances of the rupee breaking 63.77 are high. This can take the currency further higher towards 63.0 and 62.58 ahead of the RBI’s policy meeting next Friday. However, if the immediate resistance at 63.77 continues to hold, the rupee can fall back to 65 once again before strengthening to 63-62.58.
For the medium term, strength in the rupee can extend towards the trend line resistance at 62, which can restrict a further rise. Reversal from here can make the rupee decline to 65-66 levels or even lower.
Medium-term target on breach of 62 is 60, which is also a psychological support.
The USD-INR futures contract failed to break above 69.38 last week and has dropped sharply below 67, thereby hitting our stop loss. The outlook is bearish now and the contract can fall to 63.1. Long positions should be avoided now and fresh shorts can be taken just below 66 if a rise to 66 is seen.
The EUR-INR futures have dropped from just below 91, thereby turning the outlook to bearish. For the contract, 87-88 could now be a good resistance region. Reversal from this region can result in a decline to 83-82.8. Traders have to wait for a rise to 87-88 to initiate short positions.
The GBP-INR futures contract has failed to break above 107 last week and has come down sharply. It can test the psychological level of 100. Traders have to stay back and watch whether 100 is going to hold or will be breached. This will give us clues about the short-term trajectory for this contract.
The JPY-INR contract did not break above 70 last week and has dropped sharply. The outlook has turned bearish now and the contract can fall to 63-62.5 in the coming days.