The rupee (INR), which were under pressure since the beginning of this week, recovered mid-day on Wednesday after the release of provisional trade deficit data. The government data shows that the foreign trade deficit in May 2021 stood at $6.32 billion. While there is no much difference compared to April’s $6.93 billion, there is an increase by nearly 75 per cent compared to May 2020 deficit of $3.62 billion. Nevertheless, one should notice that the deficit has shrunk substantially since the beginning of the pandemic as the global trade stalled and it can increase considerably if normalcy returns. But how quick is still an uncertainty.

Taking Wednesday’s close into account i.e., 73.08 against the $, the rupee still remains one of the best performing Asian currencies and the year-to-date return is flat.

Improving foreign flows

Although the net fund flow of the foreign portfolio investors (FPI) in May was negative i.e., net outflow of ₹1,958 crore, there is a considerable improvement when compared to net outflow of ₹8,836 crore witnessed in April, according to National Securities Depository Limited (NSDL) data. Interestingly, the net inflows for June is already at ₹5,613 crore. Equity segment, which were the laggard in last couple of months, seems to be gaining back the attention of foreign investors as the benchmark indices hit a fresh all-time high this week. While equities saw net inflow of ₹5,687 crore, debt saw net outflow of ₹115 crore in the first two days of this month. During the coming weeks, the foreign funds flows can increase at a steady rate if equity market can sustain the positivity, this can help the rupee to strengthen.

Technical analysis

The rupee, which continued to appreciate, faced a stiff resistance at 72.30. Also, the 52-week high is at 72.26 making the resistance stronger. Besides, the rupee has faced a sell-off twice from that level in 2021. On the back of this hurdle, INR declined to mark a two-week low of 73.31 on Wednesday. Even though the rupee recovered in the second half yesterday, it closed at 73.08 i.e., below the support at 73. However, the last one-month trend is favorable to INR and is likely to recover past the 73-mark. But once again 72.30 can disrupt the bullish momentum. On the other hand, a rally above 72.26 can be followed by another leg of uptrend.

The dollar index has been moving in a horizontal trend for the past couple of weeks. That is, it has been oscillating in the band between 89.60 and 90.20 and until either of these levels are breached, the trend will remain unclear. A breakout of the resistance at 90.20 can turn the short-term trend bullish which can take the index to 90.80 and 91.00 whereas a breach of the support at 89.60 can drag it to 89.20 – its 52-week low. While this can provide good support, a break below this level can intensify the sell-off.

Outlook

Although the rupee faced a sell-off during early part of the current week, it is likely to get back to its way upward. Supporting this, the foreign inflows are improving, and the dollar index shows persisting weakness in the greenback. Against this backdrop, the rupee will retain bullish bias and could advance to 72.30 again in the coming week. For the subsequent movement, the reaction by INR to this level should be closely monitored.

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