The downward slide in the rupee continued over the past two weeks, with the currency breaching the 56 level against the US dollar. It currently trades at 55.65, down 0.4 per cent over the fortnight. With investors jittery about deteriorating political and economic conditions in the Euro zone, and little to cheer about the global economic outlook, there was a flight to safety of the US dollar.

This was despite weakness in the latest US jobs data. The Dollar Index gained a strong 1.6 per cent over the fortnight, and currently trades at 82.82. Meanwhile, on the other side of the Atlantic, the Euro's rout continued due to heightened concerns about Grexit (exit of Greece from the Euro zone) and worries about the economic situation in Spain. The euro lost 2 per cent against the dollar over the last fortnight, and currently yields 1.243 USD per piece.

A weak euro resulted in the rupee gaining 2.2 per cent against the currency over the past couple of weeks. The INR currently trades at 69.17 against the euro.

Double Trouble

While bleak global economic conditions contributed to the rupee's weakness against the dollar, disappointing domestic economic data too added to the woes. India's economic growth slumped to 5.3 per cent in the fourth quarter of 2011-12. Full year growth for the last fiscal estimates has been revised downward to 6.5 per cent, sharply lower than the 8.4 per cent recorded in 2010-11.

Also, the investment rate in the country in 2011-12 fell to 29.5 per cent of the GDP, a low last seen in 2004-05. Besides, latest external trade data showed that India's exports grew just 3.2 per cent in April 2012 over the same period last year, lower than the 3.8 per cent growth in imports.

This puts further pressure on the current account deficit situation.

The sharp hike in the price of petrol on May 23 raised hopes that the Government was addressing the perception of policy paralysis. This aided the rupee recoup some of its losses. The relief though was short-lived.

Technical Outlook

Dollar-rupee : The dollar-rupee pair recorded a new life-time low of 56.5 on May 31. But it did not decline further and reversed higher from that level. The upswing, however, halted below the short-term hurdle at 55.05. This currency pair needs to strengthen above this level to indicate that the short-term trend is reversing higher. Subsequent targets would be 54.6 and 54.1.

But inability to rally above 55 will imply that the currency can decline once more to 56.5 or 57.3 in the upcoming weeks.

Key medium-term resistance for the rupee is at 53.5. A close above this level is required to signal that a sustainable uptrend is unfolding.

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