Rupee slips further

There was little respite for the rupee over the last couple of weeks. It lost 0.6 per cent against the US dollar and currently trades at 55.97. The currency’s loss against the euro was sharper (2 per cent) with the Euro-INR pair currently quoting at 70.61.

RBI status quo

The stream of bad news on the domestic economic front dragged down the rupee. Inflation in May remained high with the Consumer Price Index rising 10.36 per cent, and the Wholesale Price Index moving up by 7.55 per cent. Industrial output growth in April remained flat, and exports in May shrank 4.16 per cent. Rating agencies S&P and Fitch warned that India’s credit rating may be downgraded. The government tried to sound brave, but this had little effect. There was wide expectation that the RBI would cut interest rates to prop up sagging growth. But the central bank belied these hopes. Giving priority to rein in inflation, it maintained status quo on the rate front. This soured sentiment further and the rupee breached the 56 level against the dollar in intraday trade on Monday and Tuesday.

Euro gains

In Europe, the slim victory of pro-bailout party New Democracy in the crucial Greek elections provided breathing space for the beleaguered euro. Voices of support at the ongoing G-20 summit in Mexico also aided the currency. Over the past fortnight, the euro has gained 1.4 per cent against the US dollar and currently yields 1.26 dollars a piece. But the troubles in Europe are far from over, with fire-fighting continuing on multiple fronts including in Spain and Italy. In the US, weak economic data led to speculation of more monetary easing by the Federal Reserve. This contributed to the Dollar Index losing 1.3 per cent over the last two weeks, to currently trade at 81.72.

Technical Outlook

Dollar-rupee: The rupee moved sideways with a positive bias last week. But it reversed sharply lower on Monday to move below the 56 mark. This currency pair has key short-term resistance at 55.1. Inability to move above this level will mean that it can decline to 56.5 or 57.1 in the upcoming sessions. Short-term resistances on move above 54.9 are 54.7 and then 54.3. The medium-term view for the currency is also down since the February peak of 48.6. This downtrend will reverse only if the currency goes on to close above 53.5. Medium-term targets for the current down-move are at 55 and 59.1.

USD-INR futures: This contract reversed higher from the recent trough at 55.3. Immediate resistance for the contract is at 56.1. Fresh purchases are recommended on a move above 56.1. Subsequent target for the contract is at 56.7. Short-term traders can buy in declines with stop at 55.