Technical Analysis

Daily Rupee call: Buy rupee on intraday declines

Akhil Nallamuthu BL Research Bureau | Updated on August 17, 2020

Last week, the rupee (INR) ended largely flat at 74.9 versus preceding week’s close of 74.93 against the dollar (USD). Therefore, the exchange rate of USDINR continue to remain within the range between 74.7 and 75.

Today, INR has begun today’s session slightly higher at 74.87. While 74.9 can be a support, subsequent support is at 75 – a crucial level. A break below this level can trigger considerable sell-off in rupee. But if the local currency appreciates, the immediate resistance can be 74.7. A breakout of this level lift INR to 74.5 and possibly to 74.35.

The Foreign Portfolio Investors (FPI) showed confidence this month as the net inflow so far stands at ₹31,236 (equity and debt combined), according to the data by National Securities Depository Limited (NSDL). At this level, it is the highest monthly net inflow since March 2019. Equity remains the favourite for FPIs as it have attracted ₹26,147 whereas debt segment’s net inflow stands at ₹896 crore. Inflows through Voluntary Retention Route (VRR) and hybrid together amounts to ₹4,193 crore. If the inflows continue for the rest of the month, it can impact rupee positively.

Trade deficit shrinks

Trade deficit contracted to $4.83 billion in July compared to $13.43 billion for the corresponding month of the previous year. The reduction was because the imports fell at much faster pace that the exports. While exports contracted by 10.2 per cent from $26.33 billion to $23.64 billion, imports shrank by a considerable 28.4 per cent from $39.76 billion to $28.47 billion. Contracting trade deficit is positive for the Indian currency.

WPI inflation negative

The Wholesale Price Index (WPI) inflation for July stood at minus 0.58 per cent against 1.17 per cent for the same month last year as per the latest government data. The inflation reading has been sub-zero for fourth straight months.

However, an increasing trend can be seen in the last three months i.e. inflation for May, June and July this year was recorded at minus 3.37, minus 1.81 and minus 0.58 respectively. This is mainly because of increasing WPI Food Index which stood at 2.73 per cent, 3.05 per cent and 4.32 per cent respectively for the corresponding months.

Foreign reserves

Every week, the total foreign reserves seem to mark fresh all-time highs. According to the weekly statistical supplement released by the Reserve Bank of India (RBI) last Friday showed that the total FX reserves increased to $538.2 billion as on August 7 i.e. it has gone up by $3.6 billion between July 31 and August 7. Foreign Currency Assets (FCA), the largest component of the reserves, was up by about $1.5 billion to $492.3 billion from $490.8 billion. The value of gold holding increased by significant $2.2 billion to $39.8 billion. This has greatly strengthened RBI’s hand in fighting potential volatility in the exchange rate of USDINR.

Dollar index

Last week, the dollar index closed little lower at 93.1 versus previous week’s close of 93.43. Though the overall trend is bearish, the index is in a consolidation phase, moving within 92.5 and 94. Until it trades within this range, the next price swing will remain uncertain.

Trade strategy

The rupee, after opening marginally higher at 74.87, is now trading at 74.82. Hence, the local currency stays above 75 and the price band 74.9-75 can be a support. Therefore, traders can initiate fresh rupee longs on intraday declines with stop-loss at 75.

Supports: 74.9 and 75

Resistances: 74.7 and 74.5

Published on August 17, 2020

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