Gurumurthy K The rupee has been volatile in the past week. The outcome of the Karnataka elections dragged the rupee to 68.14 last Tuesday. However, it managed to recover from those levels to make a high of 67.58 on Thursday.

Reports suggest that a possible intervention from the RBI might have been the trigger for the recovery in the rupee. However, the currency failed to sustain higher and lost momentum again. It fell below 68 again and made a low of 68.16 before closing at 68.12 on Monday, down 0.9 per cent for the week.

The US dollar index is retaining its strength. Though the index fell in the initial part of last week, it managed to reverse higher. The index fell to a low of 92.24 but has clawed back and risen sharply, breaking above the key resistance level of 93. It is currently trading at 93.90. Immediate resistance is in the 94.10-94.20 region, which is likely to be tested. If the dollar index reverses lower from this resistance region, an intermediate pull-back to 93.5 or 93.3 is possible. However, the downside is expected to be limited as the overall bullish outlook remains intact. As such, an eventual break above 94.20 will increase the likelihood of the index rallying to 95.25 in the short term. Such a rally in the dollar index will drag the rupee lower to test the previous lows of 68.86.

Foreign portfolio investors (FPIs) extended their selling spree into the fifth consecutive week. They sold $885 million in the Indian debt segment last week. The FPIs have sold $2.17 billion in the debt segment so far, this month. The selling pressure from the FPIs has played a vital part in dragging the rupee lower over the last few months.

The bearish outlook remains intact for the rupee. Immediate resistance is at 68 and then a key short-term resistance is in between 67.60 and 67.50, which is likely to cap the upside in the rupee. A fall to test the previous lows of 68.86 is likely in the coming days. The region between 68.85 and 68.90 is a crucial support to watch. Whether the rupee manages to reverse higher from this support zone or not will be key to deciding the next leg of move.

Rupee outlook

If the rupee manages to recover from the 68.85-68.90 support zone, a relief rally to 68 is possible in the short term. Since the rupee has fallen sharply in a very short span of time, the probability of this relief rally is very high.

A break above 68 can even see this relief rally extending toward 67 or 66.80. But from a medium-term perspective, the strength in the rupee is expected to be capped by the key resistances between 67 and 66.80. The rupee strengthening beyond 66.80 looks unlikely at the moment. As such an eventual break below 68.90 will see the rupee falling to fresh lows of 70 and 71 levels in the coming months.

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