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The Indian rupee remained weak at sub-60 levels in a truncated week that had only three trading days. The currency was stuck in a narrow range between 60.2 and 60.5 and closed 0.2 per cent lower at 60.29.
Pressure is building on the rupee as macro economic data continues to be weak. Inflation, which has been cooling since December, is threatening to heat up again. Wholesale price index (WPI) inflation surged by almost 1 per cent to 5.7 per cent in March from 4.7 per cent a month earlier. On the other hand, a sharp rise in food inflation to 9.9 per cent in March from 8.12 per cent in February took consumer price index (CPI) inflation higher to 8.31 per cent from 8.10 per cent in the same period a year ago.
The reversal in inflation to higher levels is bringing back expectations of a rate hike. This could keep the rupee under pressure and limit its strength.
Foreign institutional investors were net sellers in both equity and debt in the past week. They sold $368.6 million in debt and $94.5 million in equity.
Continuous selling in debt is restricting the rupee from strengthening beyond 60. They have sold $1.13 billion of debt in the last five weeks.
Dollar indexThe dollar index was range-bound between 79.5 and 79.9 last week. The short-term outlook for the index is mixed.
It could range from 79.5 to 80.5, with the probability high for a rise to 80.2 in the coming week. The Bloomberg-JP Morgan Asian dollar index (ADXY) is hovering near its crucial resistance at 116. A strong break of this will be bullish for the index and it will also be a good sign for the Indian rupee.
Dollar-rupee outlookThe rupee has been gradually weakening from its high of 59.6 over the past three weeks. In this regard, the currency could extend the decline to test 60.7 in the coming week.
However, price action on the charts indicates a positive bias for the rupee to regain strength. The level of 60.7 is a crucial support that could restrict the current fall.
A reversal from this level could take the rupee higher to 60 and 59.8 in the short-term. This move could be sharp and swift.
On the other hand, a break below 60.7 could drag the rupee lower to 61 and even 61.5. The medium-term outlook continues to be bullish, with strong support at 62.
As long as the rupee remains above this level, the chances of it strengthening to 59 and 58 cannot be ruled out.
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