Expect rupee to strengthen

The Indian rupee lost momentum in a truncated week that had only three trading days. The currency reversed lower from 59.6 on Wednesday to 60.39 on Friday before closing at 60.09, down 0.3 per cent for the week.

Though the Reserve Bank of India did not surprise the market and kept key interest rates unchanged, as per expectations, weak macro economic data releases in the past week limited the rupee’s strength and kept it under pressure.

The fiscal deficit widened to ₹5.99 trillion, or 114.3 per cent of the full-year target of ₹5.25 trillion. Both the manufacturing and the service purchasing managers’ index (PMI) slowed down in March. The manufacturing PMI fell to 51.3 from 52.5 a month earlier, while the services PMI dropped to a three-month low of 47.5 in March.

Following the weak data releases last week, the market will be closely scrutinising the trade and industrial production data releases this week.

Foreign institutional investors (FIIs) continue to buy Indian equities, but flows into the debt segment have been mixed over the past three weeks. FIIs pumped $815 million into equity and a mere $41 million into debt in the past week.

The dollar index breached its resistance at 80.25 last week and is looking bullish in the short-term. Support for the index is at 80.0 and as long as it remains above this level, a rise to 80.8 and 81.3 is likely. However, an intermediate dip to 80.2 before a rally cannot be ruled out.

The weekly candlestick chart for the USD-INR pair reflects indecisiveness. Resistance for the rupee is at 59.8. The short-term outlook remains weak and chances of the currency weakening to 60.7 will be high as long as it remains below this level.

However, 60.7 is a strong support that can limit the fall and result in the rupee reversing higher again. On the other hand, if the rupee breaks the hurdle at 59.8 immediately, it could strengthen to 59.3 in the short-term.

The medium-term outlook is bullish. Key supports for the currency are seen at 61 and 62. Technically, last week’s reversal from the high of 59.6 could be considered a corrective move to test 61, which is the neckline of the triangle. Having said this, the chances of the rupee strengthening to 59 and even 58 in the medium-term are still alive.

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