Rupee’s strength likely to be capped

It was a volatile week for the rupee. As expected, the currency fell sharply last week breaking below the support at 65.20. It touched a six-month low of 65.89 on Thursday.

The pace of fall was threatening to drag it below 66. However, the rupee made a smart recovery from the low of 65.89, recouping most of the losses made during the week and closed at 65.28.

A recovery in the dollar index, coupled with a few domestic factors like slowdown and deficit concerns, kept the rupee under pressure in the past week.

A sharp sell-off in the Indian equity market also weighed on the rupee.

Foreign portfolio investors (FPIs) are on a selling spree in the Indian equity segment. They were net sellers of equity for the second consecutive month. After selling $2.23 billion in August, the FPIs sold $1.75 billion last month.

The debt segment also witnessed a slowdown in September. The FPIs had bought just $219 million last month after buying $3.2 billion on average in each of the previous six months.

This has raised the possibility of the FPIs turning net sellers in the debt segment as well in the coming months.

In that case, pressure might mount on the rupee and drag it further lower against the dollar in the coming weeks. The dollar index witnessed a strong rise in the past week.

The index broke above the key resistance at 92.80 and hit a high of 93.66. After consolidating between 93 and 93.6 since then, the index seems to have regained momentum.

There is a strong likelihood of the index rallying to 94 or even 94.5 in the coming days. Immediate support is at 93 and the next significant one is in the 92.8-92.7 zone.

These supports are likely to limit the downside in the dollar index in the short term.

The US GDP data release last week, which has increased the hopes of another rate hike in December, may support the dollar index to move higher in the coming days. The US grew at 3.1 per cent in the second quarter.

A strong dollar index may limit the upside in the rupee and keep it under pressure.

Though the rupee has recovered from its low of 65.89 last week, the upside is expected to be limited. Resistance is at 65 which can be tested if the rupee sustains above 65.4 this week.

The possibility of breaking above 65 is low at the moment. But such a break can see the rupee strengthening further to 64.8 or 64.7 over the short term. However, 64.8-64.7 is a strong resistance zone which is likely to halt the upmove. Further break above 64.7 is unlikely.

Near-term support for the rupee is in the 65.40-65.50 region. A strong break below 65.50 can take the currency lower to 65.9 or 66 in the coming days.

A decisive break and close below 66 will then increase the likelihood of the rupee declining to 66.5 thereafter.