Indian financial markets were caught up in election-related euphoria last week, with stock prices and the rupee strengthening. The rupee rallied from Monday’s low of 62.14 to 60.95 on Friday before closing 1.1 per cent higher for the week at 61.08.

Foreign institutional investor (FIIs) inflows through the week played a key role in pushing up the domestic currency, with FIIs buying $1.67-billion of debt and $498.5-million of equity. Strong inflows into the debt segment since December have helped restrict any fall in the rupee. The debt segment has attracted $6.4-billion since December, while equities attracted $3.4-billion.

Data delight

Good economic data also lent a helping hand to the rupee, particularly news that India’s current account deficit narrowed to $4.2-billion in the December quarter from $5.2-billion in September. In addition, the manufacturing Purchasing Managers’ Index rose to one-year high of 52.5 in February from 51.4 in January. The service PMI also improved to 48.8 in February from 48.3 a month earlier, though the trend of contraction persists. The consumer price inflation data release on Wednesday and wholesale price inflation data on Friday are two crucial events this week. Industrial output numbers are also slated for release.

The European Central Bank left interest rates unchanged at its meeting last week and did not give any indications of a further stimulus. It also revised its 2014 growth outlook to 1.2 per cent from its earlier projection of 1.1 per cent.

This triggered a sharp rally in the euro to 1.39 and dragged the dollar index below its crucial support of 79.9. The outlook remains weak and it could fall to 79 or even 78.6, but a decisive break above 80 will provide relief.

Dollar-rupee outlook

The rupee broke out of its three-week sideways range of 61.75-62.5 and strengthened last week. Crucial resistance is seen at 60.8, but if this barrier is broken, it will add momentum to take the rupee to 60.5 or even 60. On the other hand, failure to break 60.8 could trigger a reversal to 61.5 and 61.8 in the short-term. The level of 60.8 is an important medium-term resistance as well.

Inability to breach this level will keep the broad medium-term range of 60.8-64 intact. It will also increase the probability of the rupee weakening to 62-63 once again. On the other hand, a break of 60.8 could take the currency higher to 59.46 and even 59 in the medium-term.

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