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On the back of considerable demand for the dollar (USD), the rupee (INR) weakened during Wednesday's session despite opening with a marginal gain. The Indian currency closed the session at 71.33, compared to its previous close of 71.28.
If the domestic currency continues to decline, it might test the support at 71.4. Below that level, 71.5 is the support. On the other hand, if the rupee advances, it will face hurdles at 71.2 and 71.1.
Inflation
The Consumer Price Index (CPI) data released on Wednesday showed that inflation continues to head north. The CPI for January came in at 7.59 per cent against 1.97 per cent for the same month in the previous year. This is also sequentially higher as the inflation for December was at 7.35 per cent. The increase can be attributed to the price rise in food items, as result of which the consumer food price index increased by 13.6 per cent. The current level of inflation is substantially above the Reserve Bank of India’s targeted level and if it stays high for a considerable period, the resulting higher inflation differential between India and the US might work against the rupee.
Industrial production
The Index of Industrial Production (IIP) data was also released yesterday. The index contracted by 0.3 per cent in December against an expansion of 1.8 per cent in November. The contraction weighs on hopes of an immediate revival. Along with high inflation, lower industrial production can act as a dampener for the market, in turn, weighing on the domestic currency.
Dollar index
After witnessing a minor correction on Tuesday, the dollar index resumed its bull run and closed with a gain yesterday. As there are no signs of a reversal, the index can be expected to gain further and test resistance at 99.15. Beyond that level, the resistance is at 99.5. On the downside, the index has supports at 98.7 and 98.5.
Trade strategy
Today, the rupee opened marginally lower at 71.37 versus yesterday’s close of 71.33. A potential dollar rally and a higher than expected inflation number can weigh on the Indian currency. But 71.4 can act as a support. Thus, for intraday, traders can short rupee below 71.4 with stop-loss at 71.2
Supports: 71.4 and 71.5
Resistances: 71.2 and 71.1
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