Technical Analysis

Rupee to stay volatile ahead of RBI MPC meet

Akhil Nallamuthu | Updated on October 02, 2019 Published on October 02, 2019

File photo   -  Bloomberg

The rupee continued to trade weak on Tuesday

BL Research Bureau

After a gradual rise in September, the rupee is facing pressure this week. The Indian currency marked an eight-week high of 70.35 but slipped below 71 against the dollar.

Even though the Government has stayed with the borrowing plan, i.e ₹2.68 trillion in the second half of the current fiscal year, the rupee continued to trade weak on Tuesday. It closed at 71.08, falling by 0.3 per cent over Monday.

Macroeconomic data

The recent set of data released does not augur well for the Indian currency. According to the monthly data of eight core sectors released on Monday, five out of eight industries shrank during August 2019 compared to the previous year. The Coal sector was impacted the most, registering a negative growth of 8.6 per cent for the month. However, steel sector recorded a growth of 5 per cent. But the overall index contracted by 0.5 per cent compared to 4.7 per cent expansion registered in August 2018.

The Nikkei Markit Manufacturing PMI for the month of September released on Tuesday was unchanged from August at 51.4. It is the slowest pace of expansion in the past 16 months. These data points, along with low inflation levels, is fuelling market expectations of a deeper rate cut by the Monetary Policy Committee of the Reserve Bank of India (RBI) when it meets this Friday. But a steep repo rate cut will put downward pressure on the interest rate differential, which in turn makes debt investments in India less attractive, prompting foreign investors to exit.

However, there was some relief looking at the Balance of Payments (BOP) data released by the RBI. The Current Account Deficit (CAD) for Q1FY20 narrowed to $14.3 billion from $15.8 billion during the same quarter last year. As a percentage GDP, CAD dropped to 2 per cent of GDP against 2.3 per cent compared to the same period last year. Trade deficit, the largest component of CAD, came in without any major change at $46.2 billion in Q1FY20 compared with $45.7 billion in Q1FY19. However, the improvement in CAD was largely driven by higher invisible receipts of $31.9 billion compared with $29.9 billion a year ago, according to the RBI.

The RBI statement said, “the foreign exchange reserves increased by US$ 14.0 billion during April-June 2019 as against a decrease of US$ 11.3 billion during April-June 2018. The foreign exchange reserves in nominal terms (including valuation effects) increased by US$ 17.0 billion during April-June 2019 as against a decrease of US$ 18.8 billion in the corresponding period of the preceding year.”

Financial Markets

After net selling Rs 12,419 crores and Rs 17,592 crores worth of equities in the months of July and August respectively, Foreign Portfolio Investors (FPI) were upbeat in the month of September as they pumped in Rs 7,548 crores into equities.

In the debt segment, the picture was different as FPIs net sold Rs 990 crores during September. In July and August, the net investments in debt stood at positive Rs 9,433 crore and Rs 11,672 crore respectively. The combined net investments of Rs 6,582 crores in equity and debt for the month of September eased pressure on the Indian currency.

USD index

The demand for the dollar picked up ahead of US-China trade talks. The dollar index has been moving up for the past one week and is currently trading at 99 levels, retesting its September high. Beyond this level, the prospect for the index crossing the all-important level of 100 is high and it could accelerate to 102 in a short period of time.

More volatility can be expected in coming days ahead of the talks between trade representatives of US and China. Further strength in dollar will take the index higher and it will weigh on the Indian currency.

Technical outlook

In the last two sessions, the rupee given up the gains it posted during the past month. On Tuesday, it closed at 71.08, near the 38.2 per cent Fibonacci retracement level of the past price swing and has moved below an import support of 71.

If weakness continues, it could depreciate towards the support band between 71.4 and 71.6. Below those levels it could fall to 72. On the other hand, if the rupee manages to gain from current levels, it could retest 70.35. Expect higher volatility as we move towards the RBI decision.

Published on October 02, 2019
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