Taper worries weigh on rupee

Currency markets were in turmoil last week as emerging market currencies, led by the lira, plunged on fears of lower liquidity driving down asset prices in emerging markets. The rupee, however, has been left unscathed by this storm, at least thus far.

RBI Governor Raghuram Rajan surprised the Indian market once again by increasing the repo rate by 25 basis points to 8 per cent. The rupee gained ground after the policy announcement, strengthening from an intra-week low of 63.3 to a high of 62.1 on Wednesday. But failure to breach 62 kept the rupee range-bound last week and it closed almost flat at 62.65.

Foreign institutional investors went on a selling spree last week in both equity and debt. After eight consecutive weeks of buying, FIIs were net sellers of $989.5 million of debt and sold $438.8 million in the equity segment.

The fear of another round of sell-offs is increasing in the market. Also, as the February 7 deadline for raising the US debt ceiling nears, nervousness can mount in global financial markets, putting pressure on the rupee.

US Federal Reserve Chief Ben Bernanke, in his final policy meeting, announced another $10 billion reduction in quantitative easing. The Fed will now buy assets worth $65 billion from February, down from $85 billion. In a surprise move, the central bank of Turkey hiked interest rates by a massive 4.25 per cent to 12 per cent. South Africa also hiked its benchmark rates by 50 bps to 5.5 per cent .

The dollar index has risen from its low of 80.15. The 200-day moving average, currently at 81.4, will be crucial resistance for the index. A breach above this resistance will turn the outlook bullish for a rally to 82.5. On the other hand, the index's inability to break 81.4 could result in it moving a sideways range between 80 and 81.4 for a few weeks.

The rupee is oscillating between its support at 63.1 and resistance at 62. A break out on either side of these levels will set the direction for the short-term trend. Price action on the charts suggests a break of 62 while the rupee trades above 63.1. Such a break can take the currency to 61.8 and 61.5. It will also increase the chances of revisiting 61 levels.

But if panic in the market increases and the emerging market sell-off continues in the coming week, there is a danger of the rupee declining below 63.1. A fall below 63.1 will turn the outlook bearish and will result in the rupee weakening to 63.7 in the short-term.

The medium-term view remains unchanged. Range-bound trade between 61 and 64 is likely to be seen over this time period. A break-out from this range will decide the trend thereafter. The targets on a break of 61 will be 60 and 59 while 64.85 and 65.79 are the targets if the rupee falls below 64.

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