The rupee rose to a three-month high of 53.8, up 1.5 per cent against the dollar over the past week. Partial deregulation of diesel prices and increase in import duty on gold and platinum improved sentiment for the rupee.
According to Oil Minister Veerappa Moily, oil companies are now allowed to change prices of diesel over a period. The move will help India to reduce its subsidy bill, thus bringing down the fiscal deficit.
The rupee fell on Monday but recovered later after the Union Government hiked import duty on platinum and gold to 6 per cent from 4 per cent. Gold imports have significantly contributed to a rise in the current account deficit.
Demand from exporters and higher foreign institutional investor (FII) inflows also supported the rupee. For the week, FIIs net purchased Rs 4,855 crore in stocks.
One-month implied volatility, a measure of expected moves in exchange rates that is used to price options, increased by 54 basis points to 10.34 for the week.
Three-month onshore rupee forwards were at 54.72 a dollar and offshore non-deliverable contracts were at 55.51 a dollar on Tuesday compared to 55.61 and 55.42 respectively last week.
The rupee was up 2.7 per cent against the pound and 1.2 per cent against the euro. The Bank of Japan doubled its inflation target to 2 per cent in line with the consensus estimates. But as the Bank announced that it will buy ¥13 trillion ($145 billion) in Japanese Government bonds and treasuries a month only from next January, the Japanese currency gained. This resulted in the yen depreciating by 0.9 per cent against the dollar.
The Dollar Index, which tracks the greenback against currencies of six US trading partners, was flat at 79.8.
Dollar-rupee outlook
The dollar-rupee pair moved higher to 53.38 in line with our expectation. Since the currency is reversing from the resistance at 53.6, it can decline further in the days ahead to 54.1 or 54.3. Short-term view will turn negative only on close below 54.3. Subsequent targets are 54.6 and 54.9.
Resistance on a move above 53.4 is 53.1. Medium-term view for the rupee will turn positive once it closes above this level.