Global Investor

Rupee can slide further

Gurumurthy K | Updated on November 25, 2017



Intra-week reversal suggests currency's short-term strength is limited

The Indian rupee was range-bound, but very volatile last week. The threat of a fall to 61 in the first half of the week eased off in the latter part after the US Federal Reserve meeting. The currency fell to a low of 60.54 on Wednesday. However, it recovered from this low to a high of 58.85 on Thursday before closing at 60.18 on Friday, down 0.7 per cent for the week.

Wholesale price index (WPI) inflation data released last week increased pressure on the Indian rupee, which was already hit by surging crude oil prices. WPI inflation rose to 6.02 per cent − a five-month high − in May from 5.2 per cent in April. The rupee will remain under pressure as high inflation will keep the doors shut for a rate cut.

Along with the developments in Iraq, the other event that needs to be closely watched now is foreign institutional investors’ (FIIs) actions.

FII concerns

After buying about $6.2 billion of debt over the past six consecutive weeks, FIIs turned net sellers last week. They sold $57 million in debt. Though the quantum of selling is small, the rupee could come under pressure if their selling gains momentum and spills over to the equity segment as well. FIIs bought $179 million worth of equities last week, compared to $1.2 billion a week earlier.

Dollar outlook

The comment from the US Federal Reserve that economic conditions might keep rates lower than normal in the longer run pushed the dollar index (80.33) lower last week.

The index faces resistance at 80.5. A short-term dip to test 80 looks likely while the index remains below this resistance. Failure to decline below 80 could keep the index range-bound between 80 and 81 for some time.

The rupee has been trapped in a range between 58.85 and 60.55. Within the range, the probability is high for the currency to weaken to 60.55 this week. Inability to move beyond 58.85 last week implies that the Indian currency could breach 60.55. Such a fall could take the currency lower to 60.9 and 61.1 in the short-term.

The immediate hurdle for the rupee is at 60, a break of which could see it strengthen to 58.85.

The medium-term outlook is bearish for the rupee. The currency has broken the bull channel in which it was trading since January. The key hurdle is at 59.6. As long as the rupee trades below this level, a fall to 61.8 cannot be ruled out.

Published on June 22, 2014

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