The Indian financial markets gave a thumbs-up to deregulation of diesel prices by the Government.

Following the announcement, the Indian rupee opened the week on a strong note at 61.2. After falling to a low of 61.37 on Monday, the currency gained strength and recorded a high of 61.16 on Wednesday.

In a truncated week, the rupee gained 0.26 per cent and closed at 61.28.

On October 18, the Government deregulated diesel prices, which means that the price of diesel will now be market-linked and track global crude prices.

The stock market welcomed the Government’s move, and the Sensex gained 3 per cent last week after four straight weeks of losses.

A strong rally in the equity market was also a factor that helped helped the domestic currency gain ground against the US dollar.

Inflows from foreign portfolio investors (FPIs) also provided support to the currency. The FPIs bought $397.96 million in debt. They also turned net buyers in equity after four consecutive weeks of selling.

The FPIs bought $42.85 million in equities last week. If FPIs continue to pump money into the equity market, the rupee could trend higher.

Cues to watch

Global markets are keenly awaiting the US Federal Reserve meeting on Wednesday. The markets will watch out for clues on the timing of the first US rate hikes in more than eight years. The outcome of this event may increase volatility in the market in the coming week. India’s fiscal deficit data release is also due on Friday. The deficit in the first five months of this financial year (2014-15) stands at ₹3.97 lakh crore. This is 74.9 per cent of the ₹5.31-lakh crore deficit estimated for this entire fiscal.

Dollar index

The dollar index (85.73) has moved up, albeit within the 84.5-86 band. The index needs to breach its resistance at 86 to rise further.

Such a breakout could take the index higher to 86.5. It will also pave the way for an up-move to 87.5. On the other hand, inability to breach 86 could keep the index within the 84.5-86 range for some more time.

The euro (1.26) and the Japanese yen (108.15), the two major components of the dollar index, are looking weak.

The euro is facing resistance near 1.28 and has not gained momentum to breach this hurdle. A fall below 1.26, will rule out the chances of an upmove. The euro could trend lower to 1.25 in such a scenario.

Similarly, the Japanese yen could fall to 110 levels in the coming days. Such a fall in both the euro and the yen could help the dollar index move past its resistance at 86.

However, the key deciding factor will be the US Federal Reserve meeting on Wednesday. The dollar index can either rally or stay within its current sideways range, depending on the outcome of this meeting.

Dollar-rupee outlook

The rupee has been stuck between 61 and 62 for the fourth consecutive week. Within this range, the currency finds support at 61.50.

The probability of the rupee strengthening to 61 in the coming week is high.

However, 61 is a strong short-term resistance and crossing this hurdle may not be easy. After testing 61, the rupee is likely to fall to 61.5 and 62 in the short term.

If the rupee manages to move past 61, it could strengthen to 60.9 and 60.8 in the coming week.

The medium-term view remains bearish. The upmove in the rupee may halt at the psychological level of 60, which is a key resistance level. A strong break below 62 could take the currency lower to 63 or even 64.

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