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The rupee (INR), after facing considerable downward pressure since the beginning of June against the dollar (USD), now seems to be gaining some ground over the past week as it has largely been held within 74.40 and 75. While the foreign flows does not seem to be encouraging, a sharp drop in crude oil price can help to domestic unit by acting as a buffer.
Crude slips
Following the agreement from OPEC plus countries to increase the output of oil, the prices tumbled on Monday. Brent crude dipped below $70 briefly and although it has recovered of the past couple of sessions, the rally is less likely to sustain as the supply-demand dynamics could change. Already, there seems to be an increase in crude inventories as per the latest data by the US Energy Information Administration (EIA). As per the latest data released on Wednesday, the inventory level increased by 2.1 million barrels after witnessing a depletion in the past several weeks. Notably, there was a reduction of 7.9 million barrels in the preceding week. There can be concerns on the demand side as well as there is an increase new coronavirus cases lately. Hence, the crude oil price will most likely remain under pressure and this can be positive for the Indian currency.
FPI negative
After turning positive in June, the FPI (foreign portfolio investors) seems to have turned a bit negative in July so far. The net investments for the month currently stands at minus ₹2,257 crore. Equities have seen a considerable net outflow of ₹7,217 crore but on the other hand, debt segment (including the voluntary retention route – VRR) has seen net inflows of ₹5,031 crore. Hybrid, that includes REITs (Real Estate Investment Trust) and InvITs (Infrastructure Investment Trust), has seen net outflow of 71 crore. As we can see, the equities remain the weakest and if the market continues to lack direction, further sell-off can be expected, potentially weighing on the rupee.
Technicals
The downtrend in INR, that began in early June, is slowing down as the local currency has not made further lows over the past week. Besides, the price level of 75 is acting as a strong support for the rupee. The price action in the daily chart indicate that INR has been oscillating within 74.40 and 75 and unless either of these levels are breached, the next leg of trend will remain uncertain. If INR strengthens above 74.40, it can possibly touch 74 whereas if it slips below the key base of 75, it can decline towards 75.50.
Outlook
The drop in crude oil price can be positive for the rupee, however, the FPI flows are negative so far this month. Moreover, charts does not indicate a definite direction as well. Given these factors, the rupee is likely to remain within 74.40 and 75 over the course of next week.
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