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The Indian rupee has turned nervous ever since it broke below the key support level of 66.50 on Thursday last week.
The currency fell to record a two-year low of 66.89 on Friday and is currently hovering above the psychological 67 level.
With key central bank meetings, that includes the Reserve Bank of India’s monetary policy on Tuesday and the European Central Bank meeting on Thursday and the release of US job numbers on Friday, it is going to be an action packed week for the Indian rupee.
The global impact
A combination of both global and domestic factors has been driving the Indian rupee lower in recent times.
The fall in rupee that began in the last week of October gained momentum after the release of US jobs data in the first week of November.
Apart from the improving unemployment rate, the rise in employee wages strengthened the case for a Fed rate hike in December.
The growth in average hourly earnings of US employees ranged between 1.9 and 2.3 per cent since 2013. The growth inched up to 2.5 per cent in October.
All eyes are now on the US job numbers for November which is due for release this Friday. A marked improvement could increase the chances of a rate hike.
While the US is gearing up for a rate hike, the European Central Bank is preparing for further stimulus. The euro has been declining sharply since Draghi signalled further fresh stimulus in October.
Recent weak data releases like the GDP data, easing inflation, industrial production falling to a six-month low, the growth in manufacturing sector contracting for the third consecutive month and the slowdown in China, have strengthened the dollar index (100.11).
It is above the psychological 100 level once again. There is a strong likelihood for the index to surge to 101.80 in the coming weeks which in turn could put more pressure on the rupee.
Domestic scenario
On the domestic front, the recent economic data releases has been weak. India’s manufacturing PMI has fallen for three consecutive months to 50.7 in October. The pressure on the currency will increase if the PMI falls towards 50 or even below, signalling contraction in the manufacturing sector.
This makes the PMI data release this Tuesday a key event to watch out for, apart from the RBI’s monetary policy scheduled for the same day.
India’s inflation reversing direction and turning higher in October has lowered the chances of a rate cut from RBI on Tuesday, which is another negative for the Indian markets.
Apart from PMI, slower growth in India’s industrial production and the exports falling for the eleventh consecutive month in October have also kept the rupee under pressure.
As the US begins its rate hike, there could be fresh outflows from the Indian markets. The Indian stock market is already feeling the heat as the Foreign Portfolio Investors (FPIs) have sold about $1 billion so far in November.
In the debt segment they have sold $488 million. If the sell-off in the debt segment intensifies in the coming weeks, in the run up to US Federal Reserve meeting on December 16, then rupee could come under renewed pressure.
In view of all these factors, the Indian rupee could continue to trade weak and there is an increased danger of it revisiting the 68 levels of 2013. Any strength in the rupee in the near-term could be short-lived.
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