Currency Call. Rupee wilts again as dollar gets its mojo

The Indian rupee was broadly range-bound in the past week. The currency opened with a huge gap-up, as expected, following weak US jobs data released on April 3. Though it opened at 62.10 on Monday, the currency failed to build on its gains as the dollar resumed its rise through the week. The rupee fell to a low of 62.41 on Friday before closing at 62.32.

The rupee has managed to edge marginally higher by 0.28 per cent even as the dollar index surged 2.7 per cent last week. But the slowdown in foreign portfolio flows in the last two weeks could break this trend and put the rupee also under pressure. Foreign Portfolio Investors (FPIs) were net sellers of Indian debt last week. They sold $54.47 million while they bought $383.47 million in the equity segment.

Mixed policy moves On the policy front, there were mixed developments for the Indian currency market last week. The levy of minimum alternate tax (MAT) on past FPI transactions remained a live issue with negative implications for FPI flows. Finance Minister Arun Jaitley commenting that legitimate tax demands could not be counted as tax terrorism was a negative. The government has clarified that the MAT waiver for FPIs is applicable only from the current financial year. However, there were other positive developments to counter this. The Reserve Bank of India (RBI) left interest rates unchanged, as was expected, last week. It also decided to allow Indian corporates to raise funds by issuing rupee-denominated bonds. Such a move is a long-term positive for the rupee because it could reduce Indian corporates’ reliance on dollar or euro loans to fund projects.

A Reuters report on Friday stated that the Indian Government could launch a scheme next month that would encourage temples to deposit their gold with banks for an interest. This is intended to reduce gold imports and address the current account deficit (CAD). Gold is the second-biggest contributor to India’s import bill.

On the macro-economic front, HSBC’s Services Production Managers’ Index (PMI) and Index of Industrial Production (IIP) data were released last week. While the Services PMI dipped to 53 in March from 53.9 in February, industrial production surged to a nine-month high. The IIP grew at a rate of 5 per cent in February from 2.8 per cent in January, resurrecting revival hopes. The much-watched inflation data is due for release this week. The Consumer Price Index (CPI) inflation numbers will be out today (Monday) and Wholesale Price Index (WPI) inflation data will be released on Wednesday. A lower inflation number could revive expectations for a mid-policy rate cut from the RBI.

Dollar outlook The dollar index (99.35) has risen sharply instead of falling to 96 as anticipated in this column last week. The trigger for the rally came from the US Federal Reserve’s minutes for the March meeting, which indicated that the possibilities are still alive for rate hikes to begin in June. But remember that the Fed meeting was held on March 18 and the minutes release does not factor in the weak jobs data released in the first week of April. The next meeting on April 29 will need a close watch for further cues.

However, the charts suggest that the dollar is set to surge, no matter how weak the incoming economic data from the US. With supports at 98.6 and 98, a rally to 101.5 — which is the 61.8 per cent Fibonacci retracement resistance — is on the cards. The major currencies, euro and pound — the two major components of the dollar index — have also turned weak. The euro (1.06) tumbled over 3 per cent last week. The sharp reversal after failing to breach 1.10 has now increased the chances of the euro breaking below the important support of 1.05. Such a break can take the euro towards parity against the dollar in the coming weeks. Similarly, the British pound (1.4615) is down 2 per cent last week and is in danger of falling to 1.40. Such a fall in both these currencies can easily lift the dollar index to 101.5 levels in the coming weeks. Global strength in the dollar could in turn keep the upside limited for the rupee.

Rupee outlook The inability to hold on to the initial gains last week is a negative for the rupee. The currency is likely to weaken to 62.5 this week. A break below this can take it further lower to 62.7 thereafter. This will keep the door open for a test of 63.1 in the short term. Key resistance is at 62.1. Only a strong breach of this hurdle will see further strength in the rupee towards 61.9.

There is no change in the medium-term bearish outlook. A series of strong resistances are poised in the 62-61 zone that could limit the strength of the rupee. There is a strong probability of the rupee weakening to 63.5 and 64 in the medium term.

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