Short-term strength seen in rupee

The rupee has been inching higher, but with low momentum over the last two weeks. The currency moved in a narrow range of 62-62.5 all through last week, but gained strength in the final trading session on Friday to close stronger at 61.93, up 0.58 per cent.

Economic data releases in the past week were mixed. India’s trade deficit narrowed to $9.92 billion in January from $18.9 billion for the same period last year, led by an 18 per cent fall in total imports. Though the trade deficit data is heartening, exports − which increased at a modest 3.8 per cent year-on-year − need to pick up to signal a sustained current account deficit decline.

Wholesale price inflation fell to 5.05 per cent in January, an eight-month low, from 6.16 per cent in December. But core inflation continued to accelerate. Consumer price inflation fell to a two-year low of 8.79 per cent in January from 9.87 per cent in December. Industrial production contracted for the third consecutive month, declining by 0.6 per cent in December. The vote on account on Monday will be an interesting event to begin the week. Though nothing significant is expected, any surprise announcement by the Finance Minister could turn the market volatile. After two consecutive weeks of selling, FIIs bought $1.48 billion in debt. Continued inflows into the debt market could help limit the downside for the rupee. However, FIIs sold equities worth $55.25 million and remain net sellers for the third consecutive week.

Weak retail sales and industrial production numbers from the US dragged down the dollar index last week. The crucial support for this index is at 79.9, which could be tested in the coming week. A break below 79.9 will turn the outlook negative and the index could fall to 79. On the other hand, if the 79.9-level holds, the index should move between 79.9 and 81.5 for a few more weeks.

The Asian dollar index has managed to sustain above 115 and rose last week to close at a critical resistance level of 116. Immediate support for the index is at 115.6. While above this support, the outlook is bullish and the index can rise to 116.7 and 117.

The dollar-rupee found support at 62.5 last week. The close above 62 on Friday is positive for the domestic currency. The short-term outlook is positive for the rupee as long as it holds above the support at 62.5. The currency could then strengthen to 61.7 and 61.4. The short-term outlook will turn negative only if the rupee declines below 62.5. The ensuing targets on such a fall will be 62.8 and 63. In the medium-term, the rupee is expected to trade between 61 and 64. A breakout of this range will set the trend thereafter. An improvement from 61 would establish 60 and 59 as targets, while a breach of the 64 per dollar-level will result in the rupee weakening to 64.85 and 65.79 levels.

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