Currency Call. Rupee on a strong footing

The rupee opened higher at 62.13 on Monday and fell to a low of 62.26 on the same day. However, the fall in the currency was limited and the rupee managed hold on to its gains and was hovering around the psychological 62 mark in a narrow range until Wednesday. This was thanks to Index of Industrial Production (IIP) data showing signs of a turnaround. The IIP for November rose to 3.8 per cent from negative 4.8 per cent a month earlier.

The return of buying interest from foreign portfolio investors (FPIs) in the debt segment, after being muted for about a month, also gave a supporting hand in limiting the downside for the currency early in the week. The FPIs bought $1.4 billion in debt and $310.3 million in equities last week.

The Consumer Price Index (CPI) and Wholesale Price Index (WPI) edged higher in December. The CPI rose to 5 per cent from 4.38 per cent in November. The WPI inched up to 0.11 per cent in December from zero per cent a month earlier. While the inflation data did not create any negative impact on the currency, a sustained increase may add pressure.

Thursday was the day of twin surprises for the forex market. In what was considered as really unexpected, the Reserve Bank of India went “outside the policy review cycle” and cut the repo rate by 25 basis points. The announcement came well ahead of the market opening as a pongal/makar sankranti gift for the Indian market. Markets celebrated the RBI’s surprise move and the Indian rupee broke its barrier at 62 to record a high of 61.48 on Thursday. However, the currency lost some of its gain on Friday and closed at 61.87, up 0.73 per cent for the week.

The second surprise came when the Swiss National Bank (SNB) removed the cap it had put on its currency, the franc, against the euro. Although the euro tumbled and the dollar surged following this, the rupee remained insulated from this shock.

Following the SNB’s surprise move last week, this week is going to be more interesting, as the European Central Bank (ECB) meets on Thursday. ECB President Mario Draghi’s press conference after the policy announcement will be crucial and would need to be closely watched. A Bank of Japan (BOJ) meeting is also scheduled for this week on Wednesday, a day ahead of the ECB meeting.

The SNB’s surprise move triggered a sharp sell-off in the euro and took it spiralling down from 1.18 to a low of 1.146 last week before closing at 1.156 on Friday. It helped the dollar index (92.52) surge to a high of 93.26 last week. The outlook for the index is bullish. Support is at 92.3 and 92, which is expected to limit the downside for the index. The dollar index is expected to extend its rally to 93 and even 94 in the coming weeks.

The Indian rupee has closed higher for the third consecutive week. But the price action on the charts on Thursday and Friday suggests that the rupee is yet to breach the psychological 62 mark decisively and will need a strong close above 62 again on Monday to reinforce the bullish momentum.

Immediate supports for the currency are at 62.05 and 62.20. Inability to break these hurdles will see the rupee strengthen toward 61.7 — the 21-week moving average — and then to 61.5 this week.

On the other hand, if the rupee declines below 62.2 this week, it could fall to 62.6, which is a key support that can limit the downside for the rupee in the short term.

While above 62.6, the Indian rupee strengthening to 61.2 and 61 in the short term cannot be ruled out.

In the medium term, the outlook is still bearish. The recent rise in the rupee is just the corrective rally of the medium-term downtrend. Key resistances are at 60.9 — the 200-day moving average level — and at 60.45, the 61.8 per cent Fibonacci retracement level.

An immediate break of these levels looks less likely. A reversal from here will see the rupee weaken back to 62-63 or even lower levels.

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