Technical Analysis

Rupee can appreciate before falling further

Akhil NallamuthuBL Research Bureau October 13 | Updated on October 13, 2021

On Tuesday, the domestic currency marked a fresh one-year low of 75.67 before ending the session a little higher at 75.51.

The rupee continued its decline over the past week against the US dollar. It slipped below the important level of 75 to mark a fresh one-year low of 75.67 on Tuesday. Thus, the year-to-date loss for the Indian unit against the dollar now stands at 3.35 per cent. While factors like strengthening dollar (appreciated by over 2.5 per cent since September beginning) and rising crude oil prices (gained over 20 per cent since September) are weighing on the local currency, the latest inflation data released by the government on Tuesday might provide a breather. But worryingly, it could be temporary wherein more strength in crude and dollar can continue to put downward pressure on INR.

The data by the Ministry of Statistics and Programme Implementation (MOSPI) show that the inflation based on the Consumer Price Index (CPI) cooled in September. It stood at 4.35 per cent compared to 7.27 per cent in September last year. Notably, there has been a sequential decline and it is on a drop for the last four months. Nevertheless, the rupee is on a decline, especially over the last two months.

Among the factors that drag the rupee is the foreign portfolio investors’ (FPI) outflows. The FPI remained net investors for the month, till a week back. But, now they appear to be pulling money out and therefore, the net investments for October now stands at negative ₹3,047 crore. This was largely due to an outflow of ₹4,120 crore from equities over the past week, taking the net outflows for the current month to ₹1,285 crore. This is despite the equity market doing well. So, going forward, further FPI outflows cannot be rejected and in such case, the local currency will feel the heat.

Charts

The downtrend in the rupee was in place with better momentum over the last week and consequently, it has dragged the INR below the key support of 75. On Tuesday, it marked a fresh one-year low of 75.67 before ending the session a little higher at 75.51.

Although the trend is clearly bearish, the INR seems to be finding support between 75.60 and 75.70. So, the chances are high for a corrective rally during the next few sessions. The rupee can be expected to touch 75.15 and then test the support-turned-resistance level of 75.

However, the rupee strengthening beyond 75 looks unlikely. As such, the corrective rally might face fresh selling pressure which can drag the INR back to the support levels of 75.60 and 75.70. A breach of 75.70 will increase the probability of the rupee touching 76. On the other hand, if INR is able to move above 75, it can rise to 74.80, a resistance level. Subsequent resistance is at 74.65.

Outlook

Even though the trend is bearish, INR has a good chance to appreciate, possibly to 75.15 or even 75, at least in the near-term. This can be on the back of the latest inflation number. Nevertheless, the hardening dollar and crude price can come back to haunt the rupee, which eventually will resume the downtrend, potentially falling back to 75.60 and 75.70 over the next week or so. Beyond that, it can even depreciate to 76 in the following weeks.

Published on October 13, 2021

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