Rupee weighed down by geopolitical tensions

BL Research Bureau

The rupee last week gained nearly one per cent and ended the week at 70.92 against the dollar, above an important resistance of 71, also breaking a significant resistance band between 71.40 and 71.60. During the past week, the rupee made a high of 70.86; a four weeks high.

Because of the unease triggered by tension in the middle east following the attack on Saudi oil facilities by Houthi rebels in Yemen, the Indian currency witnessed sell-off and opened the current week lower at 71.68 against the dollar on Monday, below important support at 71.40. Even though the rupee attempted to recover, the prevailing global sentiment weighed on the rupee.

Indian equity markets too felt the heat. The FPIs have net sold ₹915 crore worth of shares in the last five trading sessions, majority of it coming on Tuesday’s session where the net selling was at ₹808 crore.

Inflation data released last week shows that it remains subdued where CPI for August stood at 3.21 per cent whereas the WPI for August stood at 1.08 per cent. This has yet again opened the argument for more than expected interest rate cut by the Reserve Bank of India (RBI) in the October meeting. The RBI governor has said that growth is the highest priority and that he needs time to assess the impact of the attacks in Saudi Arabia on oil supply scenario.

The European Central Bank’s actions have increased the pressure on RBI to cut rates, further. The ECB cut the benchmark rate by 0.1 per cent to record a low of minus 0.5 per cent, pushing the rates further into negative territory. It has also resumed the bond-buying program according to which it will pump in 20 billion euros every month into the economy. However, it is to be noted that these rate cuts indicate a lack of growth in major economies.

In the US, Federal Open Market Committee (FOMC) of the Fed meets this Wednesday, and the expectation is that there will a 25-bps cut in the policy rate.

Key levels:

On Tuesday too, the rupee slid after a weak opening at 71.83 and ended the session at 71.78 after recording an intra-day low of 71.97. Currently, it is hovering around critical support of 72, a break of which could intensify the selling in the Indian currency. Below the 72-level, the rupee will find support at 72.4. Alternatively, if 72 levels can arrest the weakness, the rupee will most likely inch towards the price band between 71.40 and 71.60.

Unless the geopolitical tensions in the middle east comes to a halt, the rupee is expected to face selling pressure, and the probability of it moving lower towards 72 and 72.4 is high.