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When Finance Minister Nirmala Sitharaman announced tax relief for domestic companies last week, the markets cheered, and a big wave of positivity was instilled. As a result, the rupee, which recently marked a low of 71.97, recouped its losses and appreciated beyond its key hurdle at 71.4, extending the gain to 70.67 against the dollar.
In the past five trading sessions, FPIs net bought a meagre ₹40 crore worth of shares, whereas DIIs net bought shares worth a whopping ₹5,189 crore. The low buying level of FPIs indicate some caution being exercised. But significant buying interest was seen in the rupee, which resulted in one-month ATM (at-the-money) volatility tumbling to 6.59 levels from 6.95. Also, 12-month NDF (Non-deliverable Forwards) declined to 74.33 from 75.23, resulting in the spread dropping to 333.7 basis points from 367 bps.
Fiscal deficit
On the other side, the revenue forgone as a result of the tax cuts raised doubts over the fiscal deficit. This resulted in the yield spiking by around 20 basis points to 6.79 levels, exerting pressure on the currency. However, it was only temporary. Further, the rupee strengthened with crude prices softening towards the end of last week.
The Fed reducing rates by 25 basis points, in line with expectations, raises the expectation of a rate cut by the Reserve Bank of India at its next Monetary Policy Committee meeting. The statement by the Fed said that fixed investment and exports remain weak as a result of the trade spat with China. By looking at the dot plot, one can observe a division among the committee members over the path of federal funds rate failing to provide any clear direction. It indicates that eight out of 17 members expect the target rates to be within 1.5 per cent and 1.75 per cent in 2020.
Bank of Japan, which also announced its monetary policy last week, kept the policy rates unchanged, stating that they will watch further developments to decide on future policy moves.
Technical analysis
The rupee has been strengthening over the past week, gaining a little over 1 per cent in the last five trading sessions. On Tuesday, the domestic currency opened at 70.8 against the dollar and registered an intra-day high of 70.72; it ended the day lower at 71.01, below the psychologically-important level of 71.
The rupee faces strong resistance at 71, and it needs to close above that level for further appreciation. On the downside, the price band between 71.4 and 71.6 is a considerable support. Hence, in the near term, the currency is expected to stay between 71 and 71.6.
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