Weekly Rupee view: 74 is the crucial level to watch

BL Research Bureau

The rupee (INR) was trading with a bearish bias over the past week against the dollar (USD). Following the monetary policy announcement of the Reserve Bank of India (RBI) today, the domestic currency depreciated and is now trading near 74 versus the greenback. Thus, the year-to-date loss of INR against USD currently stands at about 1.3 per cent. Nevertheless, the rupee remains one of the best performing Asian currencies for the year so far.

Rates unchanged

The RBI monetary policy committee decided to the maintain status quo concerning repo rates as expected. The governor announced that the policy will remain accommodative and has further announced liquidity measures measure like the extension of the TLTRO (Targeted Long Term Repo Operations) scheme by another six months and purchase of government securities worth ₹1 lakh crore in Q1 of 2021-2022 under what is termed as G-sec acquisition programme or G-SAP. While the yield dropped because of this, the initial rupee depreciation can be attributed to G-SAP because of the potential increase in liquidity in the system.

Inflows in Debt-VRR

The foreign portfolio investors (FPI) increased the net inflows over the past week, and it now stands at ₹53,839 crore, i.e., an increase of about ₹4,600 crore. Notably, the debt market seems to be attracting the attention of FPIs as it has seen an increase in the inflows, whereas the equity segment witnessed a pull-out of funds. The net investments into equity dropped by ₹2,824 crore to ₹53,388 crore, and the debt largely remained unchanged, i.e., a net outflow of ₹15,285 crore. However, the investments through the debt-voluntary retention route (VRR) jumped by ₹7,289 crore to ₹15,686 crore. As long as the inflows in any form remain solid, the rupee can draw strength from foreign inflows.

INR-USD chart

The rupee downtrend began a couple of weeks after it faced strong resistance at 72.25. The fall was swift, and the local currency paused and started to move sideways in the past few sessions. However, it seems to have resumed the decline as it has breached the key supports at 73.60 and 73.80 and is now hovering around the important level of 74. Though the chart of the currency pair looks bearish, the price level of 74 can act as a support for INR. But if this level is breached, the rupee will most likely touch 74.50 and could even depreciate to 74.75 in the near-term .This looks highly probable given the recent downside momentum.