Global Investor

MAT issue spooks the rupee

Gurumurthy K | Updated on January 23, 2018



The currency could slide to 64 if foreign investor outflows intensify

It was a stormy week for the Indian financial markets. The Indian rupee tumbled below the psychological 63 mark and closed on a weak note. The currency opened at 62.54 on Monday and fell to a low of 63.65 on Friday before closing the week at 63.56. The currency was down 1.88 per cent in its worst weekly fall since August 2013.

The uncertainty over Minimum Alternate Tax notices to foreign investors overshadowed the global weakness in the greenback and kept Indian markets under pressure. Foreign Portfolio Investors (FPIs) turned net sellers of the Indian debt last week and sold $427.77 million. The Government has since moved into damage control mode and issued some clarifications. But the pressure could sustain on the rupee if the sell-off by FPIs persists.

While market reports attribute the 3.5 per cent fall in the Indian benchmark indices to the sell-off by the foreign investors, data from the NSDL shows that there was an unexpected $2.6 billion inflow into the equity segment on a single day on April 21. This may need clarifications.

US Fed meeting

There were no major domestic macro-economic data releases in the past week and none is scheduled for the coming week either. However, the key event to watch this week is the outcome of the US Federal Reserve meeting on Wednesday. Markets will watch for any hints on when the rate hike cycle could commence. Housing data in the past week paints a mixed picture on the recovery in this sector, one of the major concerns for the Fed.

Even if overt cues on rate hikes are unavailable, what Janet Yellen has to say on the housing sector and falling US exports will be closely watched.

The US dollar index (96.86) fell 0.7 per cent last week. It has immediate support at 96.65, a break below which can drag it further lower to 96. It will also keep the index pressured for a fall to even 95 thereafter. Since domestic issues are dominating movements in the rupee, one can’t be sure if a fall in the dollar index will help the rupee to strengthen. If the dollar index reverses higher from 96 to 97-98 again, it could have an adverse effect as it could increase the downward momentum in the rupee.

Rupee outlook

The rupee’s strong close below 63 last week, for the first time in more than three months, is a significant negative for the currency. The short-term outlook is bearish. A fall to test the next support at 63.9 is possible this week. A further break below this support can drag it lower to 64.15 thereafter.

Key resistances lie at 63.35 and 63. These levels can be tested if the rupee reverses higher from 63.9 or 64.15. However, any short-term move in the rupee is expected to be capped at 63 at the moment.

The rupee is heading towards the medium-term target of 64. The key level to watch now is 64.15.

A decisive break and a weekly close below this level could increase the bearish momentum. In such a scenario, a fall to 65 and even 66 cannot be ruled out. But a reversal from 64.15 could give temporary relief and take it higher to 63.

Published on April 26, 2015

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