It was a volatile week for the Indian rupee. The currency tumbled to a new record low of 72.91 on Wednesday, and recovered sharply from those lows to make a high of 71.52 on Friday. Reports on the government planning measures to curb the free-fall in the rupee helped the currency gain ground in the past week. However, the positive momentum was short-lived, as the rupee fell again below 72 on Monday, giving back most of the gains and closed at 72.50.

Sell the fact

The movement in the rupee last week is a clear example of the famous market saying, “Buy the rumour, sell the fact”. After recovering sharply from the all-time low of 72.91, the rupee lost ground as the actual measures announced by the government failed to please the market. The government, on Friday, announced a few measures to enhance capital flows and reduce current account deficit.

The measures include exemption of withholding tax on masala bonds, permitting external commercial borrowings in the manufacturing sector up to $50 million with a maturity of one year instead of three years, relaxing the exposure limits of foreign portfolio investors in corporate bonds, and curbs on non-essential imports (the list of commodities is yet to be finalised).

Experts feel that these measures may not have a large impact. As a result, the rupee opened with a wide gap-down below 72 on Monday and was back under pressure.

Crude oil price movement will need a close watch in the coming days. The WTI-Crude Oil ($69 per barrel) prices have been hovering between $67 and $71 per barrel over the last few days. The outlook for oil is bullish.

As long as the WTI-Crude Oil prices remain above $64, there is a strong likelihood of it surging to $76 or even $78 in the coming weeks. This, in turn, will see India’s trade deficit as well as current account deficit widening further. Such a rally in oil prices will continue to keep the rupee under pressure, and may drag the currency to new lows, going forward.

The broader bearish outlook remains intact for the rupee. The region between 72.1 and 72 will be a strong near-term resistance for the currency. Support is in the 72.9-73 region. A range-bound move between 72 and 73 is possible in the near term. An eventual break below 73 can drag the rupee lower to 73.7 over the short term.

A further break below 73.7 will increase the likelihood of the rupee tumbling to 74.5 over the medium term.

The currency is likely to get a breather only if it breaks above 72. In such a scenario, an upmove to 71.5 can be seen again.