Currency Call. Rupee on a weak footing, could slide further

There was bubbling euphoria in the equity market last week, but in sharp contrast, the currency market had no reason to pop the champagne. While the stock market celebrated as the Nifty touched the 8,600-mark on Friday, the currency segment was glum as the Indian rupee closed below 62 for the first time since February, both on a daily as well as weekly basis.

The week started well enough with the rupee opening slightly higher at 61.69 and climbing to a high of 61.65 on Monday. After an uneventful week, the currency fell below 62 to record a low of 62.075 on Friday before closing at 62.03, down 0.42 per cent for the week.

Why the drop? Strong month-end dollar demand from oil importers kept the rupee under pressure. Also, fiscal deficit worries continued as the current account deficit widened to ₹4.76 lakh crore in the April-October period, 89.6 per cent of the full-year target of ₹5.31 lakh crore. This has increased doubts on whether the government can meet its target of restricting the fiscal deficit to 4.1 per cent of GDP for the year.

The surprise easing of gold import curbs does not bode well for the deficit. The market was widely expecting that gold imports will be further tightened during Parliament’s winter session, which began last Monday. But to everyone’s surprise, the Government eased gold import curbs on Friday.

GDP numbers were nothing to cheer either. India’s growth slowed to 5.33 per cent in the second quarter from 5.71 per cent in the previous quarter. The major drag was the manufacturing sector, which contributes about 15 per cent to total GDP. The sector grew by a mere 0.12 per cent on a year-on-year basis, compared to a thumping 3.46 per cent expansion in the first quarter.

Is there a silver lining to the slowdown? The tepid numbers certainly add pressure on the Reserve Bank of India (RBI) to cut rates. But this may take a while and the market widely expects the RBI to maintain status quo in its monetary policy meeting tomorrow. Besides the RBI meeting, the HSBC Manufacturing Purchasing Managers’ Index (PMI) today and Services PMI on Wednesday are the key data releases this week.

Bad news aside, buying spree by foreign portfolio investors (FPI) continued. They bought $461.36 million in debt and $480.89 million in equity in the past week. At a total of $40.32 billion ($24.43 billion in debt and $15.88 billion in equity) so far in 2014, the FPI inflows are at an all-time high, surpassing the $39.45 billion of inflows seen in 2010.

The dollar index (88.35) is consolidating sideways within its overall uptrend. Support for the index is at 87.5. Staying above this level keeps the bullish view intact. Key resistance for the index is at 88.6, and is likely to be tested this week.

A strong break above this level could take the index higher to 90 in the coming days. Among the major index components, the euro (1.2451) is consolidating sideways against the dollar, between 1.235 and 1.26. The overall trend remains down, with a target of 1.225.

The British pound (1.5632) remains bearish for an immediate target of 1.55. There is a danger of the fall extending further to 1.525 and 1.51. The Japanese yen (118.5) is weak and could fall to 120 and 122 against the dollar. The weakness in major constituents raises the chances for the dollar index to rise to 90 in the coming days.

The close below 62 is a weak sign for the rupee. The immediate outlook is bearish. Resistance for the currency is at 61.85. As long as the rupee trades below this level, a fall to 62.35, an important support level, looks likely this week. Short-term strength in the rupee is possible only if it breaches 61.85. In such a scenario, the rupee could strengthen to 61.65 and 61.50 in the short term. But such a strong move in the near term looks unlikely.

Whether the rupee is going to break 62.35 or reverse higher will be key in deciding the next leg of movement for the currency.

The level of 62.35 is a key medium-term support. Both the 38.2 per cent Fibonacci retracement as well trend line support are poised at this level. A reversal from this support will see the rupee strengthen to 61.9 in the short term. On the other hand, a strong break below 62.35 will increase the pressure on the currency and could drag it lower to 63 and 63.6 thereafter.

On the charts, the bias is bearish and there is a strong likelihood of breaking 62.35 and falling to 63.6.