The rupee (INR) is the best performing Asian currency in the last one month. It extended the rally over the past week as well and thus, the one-month return stands at nearly 2.2 per cent against the dollar (USD). The year-to-date (YTD) is now down to 1.3 per cent as on Tuesday when it closed at 75.33.

While there are reports that corporate inflows are contributing to the rupee appreciation, it should also be noted that the forex reserves have dropped by about $14 billion in March. This hints at the possible intervention by the Reserve Bank of India (RBI). The recent rally in equities is an indication of risk-on sentiment, helping INR as well. The foreign flows, which have been negative in the first three months this calendar year, is showing some signs of relief – the FPI (Foreign Portfolio Investors) net investments this week is at $1.1 billion. But it is too early to claim that the FPI selling trend has reversed. Notably, March saw net outflows of $6.6 billion.

Charts

The rupee broke out of the resistance at 75.75 last week and turned the near-term trend positive. The price action is bullish and it hints at further appreciation in the Indian currency. From Tuesday’s close of 75.33, the nearest hurdle is at 75, above which 74.60 can act as the next considerable barrier. It should be noted that at 75 a trendline resistance could be a problem for the bulls. That is, there might be a corrective decline before breaking out of 75 and rallying to 74.60 in a week or so. On the other hand, if there is a decline below 75.75, INR could drop to 76 and then possibly to 76.20.

That said, even though the dollar index (DXY) rallied in the past few sessions, it still remains within the range of 97.70-99.40. Until either of these levels are breached, the next leg of trend cannot be confirmed. A breakout of 99.40 can lift DXY to 100 quickly whereas a breach of 97.70 can drag it towards the support band of 97.25-97.

Outlook

The rupee will most probably touch 75 this week. But the reaction at this level should be closely watched. Note that the RBI is set to announce its monetary policy decision this Friday during market hours and this can induce some volatility.

Given the prevailing conditions, traders can stay away now and can execute any of the following suggestion based on which occurs first. One, wait for a pull back to 75.60 and buy INR with stop-loss at 75.80. Two, go long on INR with stop-loss at 75.30 if it breaches 75. For both the ideas, the exit point is at 74.50 i.e., liquidate all your INR longs.

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