Currency Call. Rupee set to fall further

You would think that the dip in consumer inflation and strong industrial output data would have propped up the rupee. But the currency continues to struggle to gain ground against the dollar. This can be attributed to strong dollar demand for defence payments, which pushed the rupee lower.

The currency traded in a very tight range for the week. It opened on a stronger note at 61.45 on Monday. But it failed to gain further strength and hovered below 61.50 for most of the week. Worse, it lost momentum in the final trading sessions and fell to a low 61.83 on Friday. It closed at 61.72, down 0.14 per cent for the week.

Surprisingly, strong Consumer Price Index (CPI) inflation and Index of Industrial Production (IIP) data released on Wednesday failed to create a positive impact on the currency. CPI inflation fell to a record low of 5.52 per cent in October from 6.46 per cent in September. Food inflation, a major concern in recent times, also eased to 5.59 per cent from 7.67 per cent over the same period. Food inflation in October last year stood at 12.9 per cent. Wholesale Price Index (WPI) inflation fell to a five-year low of 1.77 per cent in October from 2.38 per cent in September and from 7.2 per cent for the same period last year.

The IIP grew at 2.5 per cent in September, compared to 0.5 per cent a month earlier. The August IIP numbers were revised higher from 0.4 per cent to 0.5 per cent.

Although the optimism is not reflected in the currency, the CPI is well below the Reserve Bank of India’s target of 8 per cent and 6 per cent for January 2015 and 2016, respectively. This has fanned speculation of a rate cut.

Foreign portfolio investors (FPIs) continue to buy Indian debt and equities. They bought $598 million in debt and $829 million of equities in the past week.

The resistance at 88 for the dollar index is holding well and is restricting the index from a further rise. As a result, the dollar index consolidated in a sideways range between 87.22 and 88.26 in the past week. There is a strong likelihood for the index to retain the sideways consolidation between 87 and 88 for some more time.

A strong breakout on either side of 87-88 will decide the next leg of moves for the index. A fall below 87 could drag the index lower to 86 while a break above 88 could take it higher to 88.4. This level is a key resistance for the dollar index. Inability to surpass this level and a sharp reversal from here can trigger a corrective fall to 85 in the index. On the other hand, a strong break above 88.4 will add momentum to the rally and take the index to 90 levels. The euro (1.2519) is holding above 1.24 against the dollar. A corrective rise to 1.26 looks likely in the near term within the overall downtrend. The pound (1.5658) and the yen (116.2), the other two major components of the dollar index, remain weak. They could fall to 1.55 and 117.5 against the dollar in the near term.

A series of important US economic data releases are due this week. Key releases to watch for include housing starts data on Wednesday and existing home sales and inflation data on Thursday. The dollar index could swing to the tune of these data releases.

The short-term outlook is bearish for the rupee. The sharp fall and close below 61.5 in the final trading sessions could keep the currency under pressure. Immediate support is at 61.85 and is likely to be tested this week. A break below this level could take the rupee lower to 62 and 62.2 in the short term.

The rupee has a strong near-term resistance at 61.5. The currency can gain strength only if it breaches this hurdle. In such a scenario, it could strengthen to 61.25 and 61.15 in the near term. But charts suggests that an immediate break above 61.5 is less likely.

The medium-term bearish outlook remains intact. Key support for the rupee is at 62.35 – the 38.2 Fibonacci retracement level. A strong below this level will increase the danger of a fall to 63.6 in the medium term.

A reversal from 62.35 could see the rupee strengthen to 62 or 61 in the medium term.

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