Bears gain the upper hand

The short-term uptrend that was in place in the rupee since January seems to be losing steam. The rupee declining below 62 to a dollar last week has altered the near-term outlook. The currency began the week on a negative note, opening with a gap-down at 61.99. Strong US jobs data released on February 6, weighed on it during opening trades.

Strong economic growth is supposed to be good for capital flows and the exchange rate. But the rupee remained unmoved by the bit of statistical wizardry that saw an upward revision in GDP growth forecasts to 7.4 per cent for this fiscal. The currency traded weak and slumped to a low of 62.47 on Thursday. It recovered from this low to close at 62.19 on Friday. Nevertheless, it was down 0.79 per cent for the week.

GDP recalculation apart, other macro-economic releases were not so supportive for the rupee.

The Index of Industrial Production rose at 1.7 per cent in December 2014, as compared to 3.9 per cent in November.

The much-watched Consumer Price Index (CPI) inflation also inched higher to 5.11 per cent in January from 4.28 per cent the earlier month. The base year for CPI has been revised to 2012. India’s foreign trade data was released after the markets closed on Friday and had mixed news for currency markets. The trade deficit shrank to an 11-month low of $8.32 billion in January from $9.43 billion in December. Oil prices contributed to this shrinkage, with the overall import bill down by 11.4 per cent.

But a worrisome statistic was the 11.2 per cent decline in exports. Once oil prices begin to stabilise, currency markets are likely to fret over the deceleration in exports.

Foreign portfolio investors (FPI) took a breather last week, turning net sellers in both equity and debt after pumping in a whopping $7.2 billion over the preceding four weeks. FPIs sold $352 million worth of equities and $10 million in the debt segment for the week. The coming weeks will need a close watch as further selling could put the rupee under pressure. The week ahead is truncated with the market closed on Tuesday and Thursday. Therefore, the movement in rupee would be largely influenced by global factors.

The dollar index (94.18) failed to breach its resistance at 95 and has reversed lower from its high of 95.11. US retail sales falling for the second consecutive month triggered this reversal. Price action in the coming week will be crucial as the index is currently poised just above its short-term support at 94.12 (the 21-day moving average). A close below this support could pressure the index and it can then glide down to 93 or even 92.8.

The downtrend will only ease if the index decisively breaks above 95. In this event, the index can rise to 95.4 and then on to 95.65. Two key events scheduled for this week will need a close watch - the European Central Bank’s meeting on Wednesday and the US Federal Reserve’s release of minutes of its January meeting.

The fall below 62 last week has turned the short-term rupee outlook bearish. The reversal from the high of 62.04 to 62.2 on Friday suggests that the rupee is having to deal with selling pressure near the psychological level of 62.

A fall to 62.4 looks likely this week as long as the rupee remains below 62. A further break below 62.4 will accelerate the slide and could drag the rupee lower to 62.7 in the short term.

The rupee is expected to gain strength only if it breaches the psychological hurdle at 62. In such a scenario, it can strengthen to 61.8 and 61.6 in the short term. The medium-term view remains bearish. Key resistance is at 61, which is expected to limit the upside for the rupee. As long as the currency trades below 61, a fall to 64 cannot be ruled out in the medium term.

COMMENT NOW