The rupee (INR) was flat over the last three weeks against the dollar (USD). Especially since the beginning of this month, INR has stayed within 74.10 and 74.50 range. Even as the recent WPI (Wholesale Price Index) inflation data shows that it has eased in July, the rupee stayed within the price band mentioned above despite seeing a positive reaction.

Data by the Ministry of Commerce shows that the WPI eased to 11.16 per cent in July compared to 12.07 per cent recorded in June. Notably, there is a drop for two consecutive months as WPI in May stood at 13.11 per cent.

Also read: Rupee gains 6 paise against US dollar in early trade

The drop was largely due to moderation in fuel and power commodity group and softening food prices. However, the WPI staying in the double digit is not favourable for the Indian currency. But the foreign inflows are positive, increasing the demand for the local unit, which can help it stay afloat.

In August so far, the net investments by the foreign portfolio investors (FPI) stand at ₹2,481 crore compared to net outflow of ₹7,410 crore last month. The inflows are mainly attracted by the equity segment as the net inflows stand at ₹1,971 crore; debt segments, including the VRR (voluntary retention route), stands at ₹484 crore whereas the hybrid segment has seen inflow worth ₹26 crore.

The domestic equity benchmarks marking new highs could be the reason the foreign flows are more focused on the equities and as along as the stock market performs well, the inflows can be expected to continue, which can contribute for the rupee appreciation.

Dollar factor

More than any other factors, dollar can have the biggest impact on the rupee. In that sense, the dollar index (DXY) should be tracked closely. It has been appreciating since the beginning of this month and is now trading around 93.10.

Also read: Rupee slips 3 paise to 74.27 against US dollar in early trade

But importantly, the price band of 93.10 and 93.35 is a strong hurdle for DXY and until this level is breached, the likelihood of a moderation from the current levels is high. A drop in dollar index could help the rupee advance but on the other hand, if the resistance at 93.35 is breached, dollar rally can intensify, weighing on the Indian unit.

Outlook

While the easing inflation and the positive foreign fund flows can have a positive effect on the rupee. The dollar, which has been showing bullish inclination, is facing a substantial barrier. But on the other hand, breaking out of 74 can be difficult for the Indian currency.

Hence, the rupee, over the next week, can be expected to stay within the 74.00 and 74.50 band but with a bullish bias. A breach of 74 can result in the rupee rising towards 73.85.

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