The India Meteorological Department retaining its outlook for a below normal monsoon this year is putting pressure on the rupee.

The currency fell to its intra-day low of 59.33, down 0.25 per cent, and has slightly recovered from there. It is currently trading near 59.26, down 0.12 per cent. The rupee one-month forward is trading at 59.49, down 0.2 per cent.

Met forecast

According to the Met department, India is expected to receive 93 per cent of the average rain this year during the June-September monsoon period. This adds additional pressure as the southwest monsoon is already delayed by one week. This coupled with the increasing chances of an El Nino formation this year is increasing the fear that the inflation could go up.

CPI inflation

According to Bank of America Merrill Lynch, the impact of El Nino could push the consumer price index (CPI) inflation to 8-10 per cent. CPI inflation stood at its three-month high of 8.59 per cent in April. The CPI data release for the month of May is due this Thursday.

High inflation will continue keep the Reserve Bank of India on hold with regard to change in interest rates. Possibility of a rate hike increases in this scenario. The RBI had left the key rates unchanged last week. High inflation also erodes the rupee’s competitiveness against its trading partners; thus affecting its Real Effective Exchange Rate.

Technical outlook

Technically, the reversal from 58.33 recorded on May 23 is a significant reversal. Also, the inability to breach 59 on Monday suggests that strength in rupee could be limited. Rupee could weaken to 59.50 and a decline below 59.50 can drag it further lower to 60 in the short-term. The currency will need a break above 59 to gain bullish momentum.

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