It was a volatile week for the rupee. The currency fell in the initial part of the week to make a low of 74.15. However, it managed to reverse sharply higher, breaking above the crucial resistance level of 72.90. The rupee surged to a high of 72.44 on Friday, but gave back some of its gains on Monday and closed at 73.13.

Oil eases the pressure

A sharp fall in crude oil prices helped the rupee to strengthen against the US dollar last week. Crude oil prices tumbled over 7 per cent in the past week. The price of Brent crude oil tumbled from around $78 per barrel to $72 per barrel. It is currently trading at $72.7. As long it remains below $74, there is a strong likelihood of the prices falling further to $70 or $69 in the near term. This can help limit the downside in the rupee in the near term. Whether Brent crude prices manage to reverse higher from the $70-$69 zone or not will decide the next move. As such, the price action around the $70-$69 region will need a close watch, which will drive the rupee movement.

The Indian debt segment has begun to see some inflows from foreign portfolio investors (FPIs) over the last few weeks. FPIs, who were on a strong selling spree since August, have turned net buyers of Indian debt over the last three consecutive weeks. FPIs bought $577 million in Indian debt last week.

However, the equity segment is continuing to see outflows. Indeed, the outflow of $3.93 billion in October is the highest-ever in a single month from the data available since 2002.

So, it will have to be seen whether the pace of purchase in the debt segment increases and can offset the selling in equities, aiding the the Indian rupee.

Rupee outlook

The strong recovery from the all-time low of 74.48 made in early October has eased the downside pressure on the rupee. The currency tested the 55-day moving average resistance, poised at 72.53 in the past week, and has reversed lower. Though the rupee can fall slightly in the near term, the downside is expected to be limited.

Key supports for the currency are at 73.2, 73.5 and 73.60. A sharp fall below 73.60 looks less probable at the moment.

As such, an eventual break above 72.50 will see the rupee appreciating towards 72 against the US dollar in the coming weeks. A downward reversal from 72 can keep the currency range-bound between 72 and 73 for some time. But a further break above 72 will see the rupee strengthening towards 71.5 or even 71 over the medium term.

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