Medium term view negative for rupee

The rupee gained 1.2 per cent against the dollar over the past week. Recovery in US economy increased risk appetite among global investors, sending funds flowing into riskier assets, including those in emerging markets. According to data disseminated by SEBI, foreign institutional investors bought stocks worth Rs 6,672 crore between January 28 and February 1. The offers for sale of Oil India and the impending NTPC offer are also reported to have attracted overseas flows.

The rupee did not react adversely to fiscal deficit for April-December 2012 being reported at Rs 407,000 crore, or 78.8 per of the budgeted fiscal deficit of Rs 991,000 crore for fiscal 2010-13. Fitch’s comment that the Government’s recent moves to boost economic growth and address its fiscal troubles are encouraging, but executing the policies remains key to improving its sovereign rating was mildly positive compared to pessimistic views expressed by the rating agency earlier.

Dollar lost around 0.4 per cent against the euro in the week and reached a low of 1.3711, the weakest level since November 2011. The US economy contracted by 0.1 per cent in the fourth quarter, which is the lowest figure since the second quarter of 2009 when the US economy was in recession. It recovered thereafter on good consumer confidence, manufacturing and construction spending numbers. The Dollar Index, which tracks the greenback against currencies of six US trading partners, was flat at 79.56 after falling to as low as 78.91.

One-month implied volatility, a measure of expected moves in exchange rates that is used to price options, decreased by 18 basis points to 9.51 for the week.

Three-month onshore rupee forwards were at 54.14 a dollar and offshore non-deliverable contracts were at 53.98 a dollar on Tuesday compared to 54.76 and 54.35 respectively last week. The rupee gained against all the G-10 currencies except the Swiss Franc.

Dollar-rupee outlook

The USD-INR pair moved sharply higher over the past week to test the key medium-term hurdle at 53.1. The currency pair recorded the peak of 52.9 on Monday before reversing lower once again in the next session.

As we have been reiterating, the medium-term view on the currency pair stays negative as long as it trades below 53.1. Since this level occurs at 61.8 per cent retracement of the previous down-move from the October peak of 51.2.

Short-term supports are going to be at 53.5 and 53.9. The 54 level is also significant from a medium-term perspective. If the rupee manages to trade above 54, it will be a sign of strength in the Indian currency.

USD-INR futures : This contract also has key medium-term support at 53.2. Though the contract price dipped below this level on Monday, it closed well above in that session. Traders holding long positions can continue to do so with stop loss at 53.

Targets on a rebound from these levels are 53.9 and 54.1. Short-term view will turn positive only on close above 54.1.

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