Currency Call. Rupee’s rally can halt at 61

It was a volatile week for the Indian rupee. The currency opened the week at 61.28. It recovered due to the lower inflation reading, but was dragged lower again on account of the expanding trade deficit. The currency fell to a low of 61.9 on Thursday before closing at 61.4 on Friday – down 0.17 per cent for the week.

Both consumer price index (CPI) and wholesale price index (WPI) inflation were lower than expected. CPI inflation for September fell to 6.46 per cent from 7.73 per cent in August. This is the lowest since the inception of this data in January 2012.

Falling food inflation, which eased to 7.67 per cent in September from 9.42 per cent in the earlier month, helped push the CPI lower. On the other hand, WPI inflation cooled off to 2.38 per cent in September, a five-year low, from 3.74 per cent in August.

The trade deficit widening to $14.24 billion in September, however, dampened the sentiment. The deficit was $10.84 billion in August and $6.12 billion in September last year. Gold imports surging 450 per cent to $3.75 billion need to be watched. The RBI allowing more banks and star and premium trading houses to import gold has triggered a rise in gold imports in recent months.

This could push the current account deficit higher, which in turn would keep the Indian rupee under pressure.

There is a divergence visible in the actions of foreign portfolio investors (FPIs) over the last few weeks. While the FPIs continue to buy Indian debt, the equity segment is witnessing foreign money outflows.

The FPIs bought $636.9 million in debt and have sold $484.4 million in equities last week. This is the fourth consecutive week the FPIs net sold in the equity segment, with total outflows of $923 million.

In the absence of any major data release in this truncated week, FPI flows and global dollar movement would largely influence the rupee. The Indian financial markets are closed on Thursday and Friday for Diwali.

The dollar index (85.1) is facing resistance near 86. The index fell to a low of 84.48 and has recovered from there. However, the index will need to break and close above 86 to bring back the bullish momentum and take the index higher to 87 and 88 levels.

While the index remains below 86, a corrective fall to 83.75 is possible in the short term. Intermediate support is available at 84.48. The euro (1.2761) and the pound (1.6093), the two major components of the dollar index, are signalling the possibility of a short-term corrective rally. The euro can rise to 1.29 or 1.30, while the pound could rise to 1.62 and 1.63. A rise in these currencies could push the dollar index lower in the coming weeks.

The rupee has been stuck between 60.9 and 62 over the last three weeks.

The reversal from 61.93 last week has averted the threat of an immediate fall below 62. The currency could strengthen to 61 this week.

However, further strength beyond this level seems unlikely as 61 is a strong hurdle for the rupee. Also, the rupee weakening to 62 levels after testing 61 cannot be ruled out. A break below 62 could take it further down to 62.5 in the short term.

The medium-term view is bearish for the rupee, with key resistance at 60.

The upside in the rupee would be capped at this level if it breaches the short-term hurdle at 61. A strong break above 62 can drag the rupee lower to 63 and 64 in the medium term.

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