Money & Banking

Repo rate cut helps stabilise weak rupee

Anand Kalyanaraman Lokeshwarri S.K. | Updated on March 12, 2018


The rupee continued its weak run over the past fortnight, slipping 1.5 per cent against the US dollar to close at 51.49. Against the euro, the rupee lost marginally (0.2 per cent) over the past couple of weeks to close at 67.69.

The rupee's loss against the dollar would have been heavier (around 1.9 per cent), but for the higher-than-expected 50 basis point cut in the repo rate by the RBI on Tuesday. The RBI's rate cut action, after 13 consecutive rate hikes over the past two years, improved sentiment in favour of the rupee. This was on the back of expectations that lower interest rates may translate into improved growth prospects and attract foreign capital flows into the country.

Sluggish economic growth has been a drag on the rupee for some time now. The low 4.1 per cent rise in the Index of Industrial Production (IIP) for February 2012 and a sharp downward revision in January IIP growth to 1.1 per cent have accentuated concerns on this front. In this context, the rate cut by the RBI may provide some respite to the rupee. It also helps that overall inflation has been showing some signs of moderation in recent months.

In the past fortnight, the euro weakened due to renewed concerns about economic recovery in the Euro Zone. The rise in Spanish bond yields to above 6 per cent dampened sentiment towards the currency. The Euro lost 0.7 per cent against the dollar and currently yields around 1.31 US dollars per piece. Expectations that the US Fed may not resort to further quantitative easing helped the dollar index rise 0.04 per cent over the past two weeks to close at 79.52.

Technical Outlook

Dollar-rupee outlook: The sharp appreciation of rupee against the dollar halted at the peak of 48.6 on February 6 and the currency is sliding lower since then. The junction where it reversed is significant since it occurred at 55 per cent retracement of the previous down-move, a Fibonacci number. As we had mentioned in our previous columns, next resistance was at 47.8 and this was the long-term trend decider for the currency pair.

It is not apparent if the current decline is a pull-back in an uptrend or a fresh leg of the down-trend from 43.8 peak. The level that we have to watch out for now occurs at 51.7 and then at 52.1. Rupee is poised quite close to these supports.

Reversal from either of these supports will imply that the currency can strengthen to 50.5, 49.8 or 48.6 again in the upcoming months. Medium-term view will remain positive as long as the currency pair trades above 52.1.

Euro-rupee outlook: Euro rupee pair is also positioned close to an important support at 68.7. This level is a medium-term trend decider. A reversal is possible below this level that can make the pair bounce back towards 66.6, 65.5 and 63.5.

Conversely, outlook for the pair will deteriorate on a close below 68.7. This will imply that the pair can slide further to 71.8.

Published on April 17, 2012

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