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The Indian rupee remained weak and volatile in the truncated past week. The currency markets were closed for two days (Wednesday and Friday) on account of public holidays. The currency fell sharply breaking below the psychological level of 70, and recorded a new all-time low of 70.3950 on Thursday. But the fall in the dollar index on Friday helped the rupee to recover on Monday. The currency opened with a wide gap-up and surged to a high of 69.60. But it failed to sustain higher, and had come off from the day’s high to close at 69.82 on Monday.
Deficit widens
The trade deficit widening to more than a five-year high in July will continue to keep the pressure on the rupee from a long-term perspective. Data release from the Ministry of Commerce showed that India’s trade deficit widened to $18.02 billion in July, the highest since May 2013.Oil prices staying at elevated levels continue to keep the import bill higher.
India’s oil imports in July surged more than 57 per cent to $12.35 billion from $7.84 billion a year ago. As the trade deficit continues to widen, the current account deficit (CAD) is also likely to increase as trade is the highest component in the current account.
As a result, there is lesser possibility of the rupee strengthening in the coming months. The strength in the rupee is likely to be capped and the currency can weaken further, going forward.
The US dollar index (96.3) has come off after testing the psychological level of 97 in the past week. A dip to 95.8 in the near term cannot be ruled out. If the dollar index breaks below 95.8, it can decline further to 95.5 or even 95.2 thereafter. Such a fall in the dollar index can help the rupee remain above 70 in the near term.
Resistance for the dollar index is at 96.9. A strong break above it can take the index higher to 97.2 initially. A further break above 97.2 will pave the way for the next targets of 97.8 and 98. Such a move in the dollar may pull the rupee to fresh lows, going forward.
Rupee outlook
The Indian rupee may get a temporary breather in the near term. A cluster of resistances are poised in between 70 and 70.20. Only a strong break below 70.2 will bring back the pressure on the currency.
Immediate resistances are at 69.5 and 69.4, which are likely to be tested as long as the currency remains above 70. A strong break below 69.4 can take the rupee higher to 69.2 or 69.1. Strong resistance is in the 69.10 and 69 region. A break above 69 looks less probable at the moment. The upside in the rupee is likely to be capped at 69 in the coming days. But if the rupee manages to breach 69 decisively it can strengthen to 68.3 and 68 thereafter. But such a strong upmove looks unlikely.
As such, a range-bound move between 69 and 70.2 is possible in the near term. An eventual break below 70.2 will bring renewed pressure on the currency.
Such a break will then pave the way for the next targets of 71 and 71.5.
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