The Indian rupee (INR) opened yesterday’s session strongly at 70.78 against its previous close of 70.89 against the dollar (USD). After trading flat, rupee decelerated sharply in the latter part of the session and tested the critical support of 71 before ending the day at 70.92.

The domestic currency has been under pressure for past three trading sessions as rallies are sold off. A break below 71 may result in further depreciation taking the exchange rate of USDINR to 71.2, below which support comes in at 71.4. However, if 71 holds and rupee gains, it will face hurdles at 70.89 and 70.75.

Core sector output data for the month of September released yesterday showed that it contracted by 5.2 per cent compared to an expansion of 4.3 per cent in corresponding month of previous year. Also, fiscal deficit for the year is currently ₹6.51 lakh crore as of September, which is about 92 per cent of the budget estimate of ₹7.04 lakh crore for current fiscal. Though it is better compared to the previous year in terms of percentage of the budget estimate, current trend might make it more difficult for the government to stick to its fiscal deficit target of 3.3 per cent of GDP, despite the dividend from the RBI. While these factors may negatively influence the forex market acting as a dampener for the rupee, weakening dollar and declining crude prices will provide some relief.

From trading perspective, as long as 71 holds, rupee will not weaken but rallies are being sold into. Hence, it is advocated to exercise caution and traders can short rupee if it breaks below 71 decisively.

Supports: 71.2 and 71.4

Resistances: 70.89 and 70.75

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