CURRENCY CALL. Rupee continues to close at record lows

The Indian rupee continues to get beaten down against the US dollar. The currency witnessed a sharp fall in the past week, and recorded a new all-time low of 71 against the dollar on Friday.

Though it managed to recover on Monday morning, it failed to sustain the strength and reversed sharply lower from 70.72. The currency closed at its record low of 71.21 on Monday, down 1.5 per cent for the week.

The decline against the dollar in August was 3.45 per cent – the highest monthly loss in the last three years. Also, the currency has been recording negative close over the last seven consecutive months since February this year.

This has been the longest losing streak since 2000 when the rupee recorded negative close for eight consecutive months.

The strong sell-off in emerging currencies like the Turkish Lira and Argentine Peso is weighing on the Indian rupee at the moment. But there is another key factor that has the potential to keep the rupee under pressure and drag it to further fresh lows – crude oil prices.

There has been a strong negative correlation between oil price and rupee since the beginning of 2018. The surge in oil (WTI) prices from around $60 to $75 per barrel was the major factor that dragged the rupee from around 63 to 69 this year.

This correlation weakened when oil prices fell from $75 in July to $65 last month. Though the rupee failed to gain from the fall in oil prices, it remained broadly stable between 68 and 69 against the dollar.

Oil prices have bounced back from around $65 last month to the current levels of $70 and, the rupee, on the other hand, has weakened from 69 to 71 over the same period.

This recent move signals that the negative correlation between oil and rupee is gaining strength again. The outlook for oil (WTI) is bullish, and the price is likely to revisit $75 levels in the coming weeks.

As such, even if the sell-off in emerging currencies eases, higher oil prices would continue to keep the rupee under pressure and can keep it at lower levels. The Indian rupee is likely to remain under pressure. A fall to 71.8 or 72 is likely in the near term. The region between 71.8 to 72 is a key medium-term resistance, which may halt the current fall. If the rupee manages to recover from the 71.8-72 support zone, a relief rally to 70 is possible in the short term.

But if the rupee declines decisively below 72, the downside pressure may increase. In such a scenario, the possibility will remain high of the currency tumbling towards 74 in the coming weeks.

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