Global Investor

Currency call: Rupee is range bound in the short-term

GURUMURTHY K | Updated on November 22, 2014

PO14_Currency_Outlook.eps

It was a volatile week for the Indian currency market. Though the rupee opened on a weak note, it gained momentum ahead of the Budget day. After hitting a high of 59.57 on Thursday, the currency lost ground and tumbled to a low of 60.3 on Friday. However, the rupee managed to regain strength and gave up some its loss in the final trading sessions to close above 60 at 59.93 on Friday, down 0.34 per cent for the week.

Fresh concerns have emerged from Portugal’s banking sector, prompting fears of a resurgence of the European debt crisis. Also, there are doubts on the ambitious fiscal deficit target of 4.1 of GDP, set out by the Indian Finance Minister in the Budget. India’s fiscal deficit has already reached 45 per cent of the amount estimated for all of 2014-15 during the interim budget. These two factors could limit a strong rally in the rupee in the near term.

At the same time few positive developments in the market, could well limit the fall in the rupee. The index of industrial production (IIP) for May rose to 4.7 per cent from 3.4 per cent in April. This is at a 19-month high—highest since October 2012. Crude oil prices have dropped sharply last week and have little room to fall further in the near term. Increasing the foreign direct investment limit in the defence and insurance sector to 49 per cent is a positive, and can attract more inflows into the country. This could also support the rupee.

After Friday’s strong IIP data release, the market will keenly watch out for both the wholesale and consumer price inflation data release today. The outcome could influence the direction in which the currency could movethis week.

The foreign institutional investors (FIIs) continue to invest in both equity and debt markets. They brought in $1 billion in debt and $682 million in equity last week.

Dollar index

The dollar index (80.19) is finding support at 80. As long as the index remains above this level, a rise to 80.5 and 80.75 cannot be ruled out in the short-term. The outlook will turn negative only on a strong decline below 80. Such a break can take the index lower to 79.75.

Dollar-rupee outlook

Rupee will be range-bound between 59.5 and 60.3 in the short-term. Last two weeks’ candle stick pattern on the chart indicates indecisiveness, with no clear outlook for the rupee in the near-term. Rupee can continue to retain its sideways range for some more time.

For the coming week, if rupee manages to sustain above 60, it can strengthen to 59.5. On the other hand, declines below 60 can drag the currency lower to 60.3.

Only a breakout on either side 59.5-60.3 range will give a clear indication on the next leg of move . A break of 59.5 can see the rupee strengthening to 59, while a fall below 60.3 can take it lower to 60.5 and even 61.

For the medium-term, 59.85 is a key hurdle for the rupee. Inability to break this level can see the rupee fall to 61.5 and 62 in the medium-term.

Published on July 13, 2014

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