The violence in Iraq has made the market highly risk-averse. The Indian rupee tumbled to a low of 59.8 on Friday, its worst single day fall since January. After recording a high of 58.98 on Monday, the currency fell and closed lower at 59.77 on Friday, down 1 per cent. Sharp rise in crude oil price triggered this fall.

The sudden unrest and fears of possible US military intervention in Iraq over-shadowed the impact of positive Indian macro-economic data released last week. Consumer Price Index (CPI) inflation fell to 8.28 per cent in May from 8.59 per cent in April. The Index of Industrial Production grew by 3.4 per cent in April. Trade data was also robust. Exports rose 12.4 per cent, while imports fell 11.4 per cent on the back of a sharp fall in gold imports. Macroeconomic data showing signs of a revival could help limit the fall in the rupee in the long-term.

The release of wholesale price index (WPI) inflation data on Monday and the US Federal Reserve meeting on Wednesday are key events to watch this week.

Foreign institutional investors (FIIs) continue to pour money into the Indian market. They bought $1.97 billion in debt and $1.21 billion in equity in the past week. The total inflow of $3.19 billion was the highest weekly inflow that the Indian market has seen since March 2012.

Dollar index The dollar index (80.61) is finding support at 80.42, its 21-day moving average. The index has been range-bound over the last couple of weeks. The possibility of a rise to 81 in the coming week is high. A break above 81 could take the index to 81.25.

Dollar-rupee outlook

The short-term outlook for the rupee is weak. It could decline to test its significant supports at 59.9 and 60.0 in the coming week. Technically, these are strong support levels. But given the uncertainty in the market, the chances for the rupee to decline below 60 cannot be ruled out. Also, the price of Brent crude, which influences the movement of the Indian rupee, could surge to $116/barrel in the short-term.

This would keep the rupee under pressure. Declines below 60 could push the currency lower to 60.30. On the other hand, a reversal from 60 could take the rupee higher to 59.5.

In the medium-term, 60.3 is a key support for the rupee. Failure to breach this support could keep the rupee range-bound between 58.5 and 60. On the other hand, declines below 60.3 could drag it lower to 61 and even 62 in the medium-term.

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