Short-term outlook for rupee remains weak

It was another week of volatile movements for the rupee. Though the currency began the week on a strong note and strengthened breaking above the psychological level of 64, it failed to sustain the momentum.

The rupee touched a high of 63.81 and reversed sharply lower breaking below 64 again and closed at 64.21 on Friday. The currency market was closed on Monday for a public holiday.

India’s trade deficit widening the most since May 2013 coupled with a recovery in the US dollar index triggered this sudden reversal in the rupee.

Deficit widens

Data release from the Ministry of Commerce showed that India’s trade deficit widened to $16.3 billion in January from $14.88 billion in December and from $9.9 billion over the same period last year.

Imports increasing at a faster pace of 26.1 per cent year-on-year (y-o-y) to $40.68 billion in January than exports, which rose 9 per cent y-o-y to $24.38 billion, and dragged the deficit to its lowest level since May 2013.

The deficit concern can keep the rupee under pressure from a long-term perspective and can limit gains in the currency.

Dollar recovers

The dollar index failed to sustain above 90 last week and fell sharply to a low of 88.25. However, the index had managed to claw back from this low and is currently trading at 89.10.

This upward reversal from 88.25 is technically significant as it has happened from a key trend-line support. Immediate resistance is at 89.50. A strong break above it can take the index higher towards 90.5 in the coming days. Such a rally in the index can drag the rupee further lower in the coming days.

The region between 88.25 and 88 is a crucial support for the dollar index. The greenback will come under renewed pressure if it breaks below 88 decisively. Such a break will increase the likelihood of the index tumbling towards 86.5 thereafter.

Rupee outlook

Inability to sustain above 64 keeps the outlook negative for the rupee. Additionally, the Indian equity market, which took a breather last week and stayed in a sideways range, seems to have resumed its downtrend.

The benchmark indices were down about a per cent on Monday and are likely to extend the downmove going forward. Weak equity markets coupled with a recovery in the US dollar index can continue to keep the rupee under pressure.

Key short-term support for the rupee is in the 64.4-64.5 region, which is likely to be tested in the coming days. If the rupee manages to reverse higher from there, it can strengthen towards 64 initially.

A break above 64 can take it further higher to 63.8 again. A range-bound move between 63.8 and 64.5 is possible in such a scenario.

But if the rupee breaks below 64.5 decisively, the possibility of which is looking high, it can fall to 65 or even 65.2 in the short term.

Such a fall will then increase the likelihood of the rupee revisiting 66 levels over the medium term.

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