Global Investor

Currency call: Rupee to trudge sideways

Gurumurthy K | Updated on November 25, 2017

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A rise in bond yields can limit the strength in the rupee

It was another uneventful trading week in the Indian currency market, with the ongoing party in the stock market failing to spill over into the currency segment. The Indian rupee strengthened after recording a low of 60.32 on Monday. However, it subsequently reversed lower from a high of 59.98 on Thursday to close at 60.10 on Friday, up 0.3 per cent for the week.

There were no major macroeconomic data releases in the past week to influence the rupee. Fiscal deficit numbers on Thursday and the manufacturing purchasing managers’ index (PMI) on Friday are the important data releases scheduled for this week.

The Reserve Bank of India raising the foreign investment limit in government securities by $5 billion to $25 billion and the government approving 49 per cent foreign direct investment (FDI) in the insurance sector could be positives for the Indian rupee. But the impact of these moves will be felt only when the money begins to flow into the country through these routes.

Foreign portfolio investors (FPIs) remained net buyers in both equity and debt. But that has failed to help the rupee strengthen beyond the psychological level of 60. The FPIs bought $1.09 billion in debt and $400.5 million in equity last week. However, a divergent trend has emerged in the equity segment. As stock indices surge to new highs, the FPI flows into the equity market have been losing momentum over the past three weeks. This is an important development that will need to be watched closely.

The dollar index (81.02) surged last week following a sharp fall in the euro and the pound. The index now faces resistance at 81.25, which could be tested this week. A strong break above this level could take the index higher to 81.5 in the coming days. The euro (1.3424) is looking extremely weak after the reversal of a long-term uptrend since June 2012. Support for the euro is seen at 1.3390, a break below which could drag it down to 1.32 in the coming weeks. The outlook will only turn bullish if the euro decisively moves beyond 1.36.

The pound (1.6964) is in a corrective fall within a larger uptrend. This fall could extend to 1.6850 if the British currency fails to rise above the psychological level of 1.70.

A weaker euro and pound could push the dollar index higher to 81.25 and 81.50. The outcome of the US Federal Reserve meeting on Wednesday will be a key event to watch out for.

Weak signals for the rupee

Rising yields on 10-year Indian government bonds indicate a weak outlook for the rupee. The yield has been consolidating sideways between 8.63 per cent and 8.78 per cent over the past one month. It started to reverse higher from 8.63 per cent − the lower band of this range − to close at 8.67 per cent last week. This has increased the probability of a rise to 8.78 per cent − the upper band of the range. A rise in the bond yield is negative for the rupee. As long as the yield remains above 8.63 per cent, the probability of the rupee strengthening past 60 is low.

Dollar-rupee outlook

The outlook for the rupee remains weak. As long as the currency remains below 60, there is a chance it could fall to 60.3 this week. Any decline below 60.3 could see the rupee weaken further to 60.5 in the short term.

But the rupee could rally if it breaches the immediate hurdle at 60. The ensuing targets on such a break would be 59.85 and 59.55.

The medium-term outlook remains bearish for the rupee. Key support for the currency is at 60.5. A break of this level could see it fall to 60.8. A further break below 60.8 could see the rupee tumble further to 61.5 and 62 in the medium term. Key resistance is seen at 59, which would have to be broken for the medium-term outlook to turn bullish.

Published on July 27, 2014

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