The rupee depreciated one-fifth of a per cent against the dollar and closed at 86.25 on Tuesday. Thus, the Indian currency has lost about three-fourth of a per cent over the past week as it had closed at 85.62 on June 10.
The local unit fell despite the dollar staying weak. This was largely due to the spike in oil prices triggered by the Israel-Iran conflict. The Brent crude oil futures ($74.70/barrel) has risen nearly 12 per cent so far this week.
As the hostilities continue, the oil prices can remain elevated, a considerable risk for the rupee as India relies on imports for most of its consumption.
The geopolitical tensions has more than countered the positive domestic fundamentals.
For May, CPI inflation (2.82 per cent vs 3 per cent) and WPI inflation (0.39 per cent vs 0.80 per cent) came in lower than expected. In addition, the mechandise trade deficit for May shrank to $21.88 billion compared to $22.09 billion for the corresponding month last year.
That said, over the past week, there were foreign money outflows albeit at a small magnitude. As per the NSDL data, the net FPI outflows between June 3 and 10 stood at $485 million.
So, overall, the military confrontation in West Asia and the capital outflows weighed on the rupee. The chart too is showing signs of weakness.
Chart
The rupee fell off the resistance at 85.50 recently. On Tuesday, it ended below the support at 86.15. So, going ahead, we can see the domestic currency declining to 86.50. The price region between 86.50 and 86.60 is a potential support.
While there might be a recovery off these levels, it can be capped to 86.15 from there we can see another downswing to 86.80 or even to 87.
Nevertheless, if there is any change in geopolitical developments for the good, the risk-on sentiment can push the rupee up, especially considering the positive fundamentals. Or in case there is a notable drop in the dollar, the rupee can inch higher.
The dollar index is now hovering around 98. After marking a three-year low of 97.60, it has recovered slightly. However, the trend remains bearish and there is a considerable chance for it to fall to 97.
That said, whether such a decline in the dollar index can aid in rupee recovery is uncertain so long as the tensions run high in West Asia.
Outlook
As it stands, the likelihood for the rupee depreciating to 86.50 is high.