Global Investor

Rupee’s woes are likely to continue

Gurumurthy K | Updated on December 22, 2014


Continued selling by foreign portfolio investors could add to the pressure

The Indian currency market had the worst weekly close in the last four months and ended below 63 for the first time since November 2013. Monday started bad enough — the currency opened on a weak note with a gap-down at 62.5.

And things went from bad to worse. The markets got jittery with weak trade deficit data released after the market close on Monday and a surprise mega interest rate hike of 650 basis points by Russia on Tuesday. This led to the rupee taking a further tumble to a low of 63.88 on Wednesday.

The market’s frayed nerves were somewhat calmed when the US Federal Reserve said it would be ‘patient’ in beginning the rate hike. Although the rupee recovered from 63.88 after this, the Fed’s trigger was not enough to push the currency above the psychological 63 mark. It made a high of 62.99 on Friday and closed at 63.30, down 1.6 per cent for the week.

Deficit worries

But are the concerns justified? Certainly, India’s trade deficit remains a worry. It widened to $16.86 billion in November from $13.36 billion in October. These are much higher than the level of $9.57 billion recorded for the same period last year. Total imports surged 26.8 per cent (year-on-year) as gold imports zoomed to $5.6 billion in November from just $835.8 million a year ago. Although exports were also up, it was a drop in the bucket – up a mere 7.3 per cent from the previous year.

The November trade deficit data is raising alarms that the current account deficit (CAD) would widen further in the October-December quarter. Data released from the Reserve Bank of India earlier this month showed that the CAD for the July-September quarter had already widened to $10.08 billion from $7.8 billion in the previous quarter and $5.2 billion in the same quarter last year.

FPI outflows

Foreign portfolio investors’ (FPIs) outflows are also a concern now. After several weeks of continuous buying, FPIs turned net sellers of both Indian debt and equity. In the debt segment, they halted their continuous buying spree that was ongoing since August 2014 and sold $29.1 million last week. In equities as well they turned net sellers for the first time since October 2014, selling $765.34 million last week.

If the FPI selling interest gathers momentum, then it would add to the rupee’s pressure in the coming days. So the FPI action for the rest of the year will need a close watch.

Also, with no major macroeconomic data to be released this week, the rupee movement will be largely influenced by global factors and FPI flows.

Dollar outlook

The global markets rejoiced after Fed Chair Janet Yellen stated that “the committee can be patient in beginning to normalise the stance of monetary policy”. The Federal Reserve’s statement did not hinder the rally in the dollar. The dollar index surged 1.4 per cent to close strong at 89.6 last week. A crucial long-term resistance is coming up for the index near 90 and this is likely to be tested this week.

Whether the index surpasses this hurdle or not will decide the next leg of the move. A strong break and a close above 90 this month would add momentum to the current uptrend. It can then take the dollar index higher to 92, or even 95, in the coming months.

On the other hand, a reversal from 90 can drag the index lower to 88 initially. A further fall below 88 will take it to the next target of 86. Take note that the price action for the rest of this year is crucial as it will set the trend for the first few months in 2015.

Rupee outlook

The sharp reversal from the low of 63.88 last week — which failed to break the psychological barrier at 63 — is a big negative for the rupee. This could keep the currency under pressure and retain a bearish outlook.

The rupee can weaken to 63.6 this week, a level where some support is seen. A further fall breaking this support could see the currency declining towards 63.8 and 64 thereafter in the short term.

The short-term outlook will turn positive only on a break above 63. It can then take the rupee higher towards 62.5. However, such a reversal looks less probable at the moment.

The medium-term view is also bearish. Strong resistances are poised at 62.5 and 62. The key level to watch now is 63.6 – the 50 per cent Fibonacci retracement level.

A strong break and a close below this level will increase the likelihood of a fall to 64.8 over the medium term.

Published on December 21, 2014

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