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The rupee (INR) remains one of the best performing Asian currencies as it appreciated over the past week as well, extending the rally that it established a month ago. It has crossed over an important level of 73 and, going ahead, dollar movement and the FPI flows are likely to keep the rupee positive. Year-to-date, the Indian currency has gained about 0.4 per cent against the dollar (USD).
Busting the myth of rupee over-valuation
FPI positive
The trend in foreign flows during the first half of May has not been favourable for the domestic currency as there was a consistent pull-out by foreign portfolio investors (FPI). However, the numbers over the past week give positive signs as there were considerable inflows. That is, the net outflows in May now stand at ₹1,331 crore, according to data by the National Securities Depository Limited (NSDL).
Notably, the net outflows before a week stood at ₹6,144 crore. Equity segment, which was under pressure due to higher volatility, seems to be gaining ground as the net outflows dropped to ₹4,915 crore compared to ₹10,266 crore a week ago. Going ahead, the equity market will most probably perform well and this can bring more foreign inflows, helping the rupee strengthen.
INR-USD chart
The rupee breached the key resistance at 73 last week and moved up further. On Tuesday, it gained by a quarter per cent and ended at 72.77. Thus, the near-term trend is clearly bullish and it will remain so until the local currency remains above the support band of 73.40 and 73.50. On the other hand, the price level of 72.30 can be a stiff resistance as the rupee has faced a sell-off twice from that level in 2021. Notably, the one-year high of rupee is 72.26. Hence, the uptrend might lose traction as INR approaches this level and the next leg of trend depends on how it reacts to that level.
The dollar index has been moving in a sideways trend over the past few trading sessions. However, it stays below the key level of 90 and the trend continues to be bearish. So, the dollar is likely to witness further depreciation wherein it can touch 89.3 in the coming week. Since 89.2 is the prior low, the price band between 89.2 and 89.3 can offer support. The daily chart of the dollar index and INR-USD is showing such a similar trend i.e., both are approaching critical levels, which could have an impact on the prevailing trend. So, one needs to be watchful of 72.30 with respect to USDINR exchange rate and 89.2 with respect to the dollar index.
Outlook
The rupee managed to gain last week despite higher inflation numbers and FPI outflows. While there has been no macro data of late, the trend in the FPI fund flow and the likelihood of equity market performing better are advantageous for the rupee. Hence, it can be expected to gain in the coming week towards 72.3. But this being a crucial price point, we need to wait and see how INR reacts to this level.
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