Technical Analysis

Rupee to depreciate further

| Updated on March 12, 2018 Published on August 25, 2012


The Indian rupee hit 57.33 levels against the dollar recently, its all time low. The currency is trapped between 55–56 levels over the last few weeks with no clarity on its further movement which is making the market curious.

Market players expect the rupee to appreciate by next year, but we don’t believe the same. Our study of the movement of the rupee since 1996 reveals that the pace of depreciation has been much steeper than the pace of appreciation.

Though the appreciation has taken more time, the percentage change has been lower than the percentage of depreciation.

The conclusion arrived from the table is

The pace of depreciation is much wilder than the pace of appreciation.

The study showed that rupee depreciated in 2 years while it appreciated for 1 year on an average.

The rupee has weakened over the last 15 years.

The heavy risk aversion in the global market could be measured with the US Treasury yield dipping below 2 per cent and hitting the record levels of 1.38 per cent which is the lowest since 1912. The Dollar Index after breaching over 100 levels in 2000 seems to have bottomed out near 72.69 levels in 2011. A fresh bull run that began in this index in 2011 has breached levels of 82 in 2012. This index can now move 88-89 levels as high risk aversion on China and relatively better growth in US economy push the indicator higher. Moreover a clear break of the Head and Shoulder pattern is also visible on the charts suggesting the above target.

The weakness in the rupee was contributed by both the domestic as well as international issues. The efforts taken by the RBI was in vain. The RBI sold around $12 billion in 2011 and around $11 billion by June 2012. The scope of RBI of intervention through dollar sales in the forex market is reduced from 2008 due to limited forex reserves and lack of sufficient flows. The declining import cover ratio is a matter of serious concern.

The performance of the dollar index during crisis and non-crisis period reveals that the global market has always boosted the dollar index substantially in crisis periods as it is viewed as a safe haven.

Few BLACK SWAN events, which could strongly boost the US dollar this year are war between US-Iran, credit excesses in China and a possibility of Indian credit downgrade.

The USD/INR maintains an upward trend and this trend is likely to continue in 2012-2013 and target rupee towards 60 levels with a best possible base rate of 52.10 in by June 2013.

(The report is prepared by India Forex Advisors. The views are personal)

Published on August 25, 2012
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