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The rupee (INR) appreciated during the second half of last week after marking a new one-year low of 75.67 against the dollar (USD). Dollar weakness and a fall in the US treasury yield aided the rupee in gaining ground against the greenback and the year-to-date loss has now moderated to 3.1 per cent. Nevertheless, the appreciation might not continue going forward as treasury yields have started to harden and crude oil price continue to be at the elevated levels.
So, going ahead, the Indian currency is likely to face downward pressure. Keep an eye on the Treasury Currency Report (semi-annual) set to be released by the US at end of this week which can induce more volatility in the USD-INR currency pair. In the last report released in April this year, India was placed in ‘Monitoring List’ by the US Treasury with respect to currency practices.
Foreign Inflows
Among factors that supported rupee appreciation last week was the foreign portfolio investors (FPI) inflows. According to the National Securities Depository Limited (NSDL) data, the net outflow in October (as on Tuesday) is at ₹487 crore compared to ₹3,047 crore a week ago. Thus, during the week, FPIs have made net investments of ₹2,560 crore. The equities segment remained the favourite destination as the market continue to hit new highs. If the market continues the rally, more inflows can be expected in the coming weeks, which can help the rupee stay afloat against the dollar.
Charts
Although the local currency rallied last week, ending up with a weekly gain, the downtrend, which has been in place since the beginning of September, stays valid. For the rupee to turn the short-term trend in its favour, it should clearly breach the resistance band of 74.85 and 75. Until then, bears will have an advantage over the bulls.
The rally was met by the resistance at 75 last week and then INR weakened and closed at 75.34 on Monday. During the coming week, the rupee can trade with a bearish bias with high probability of depreciating to the support band of 75.60 and 75.70. A clear breach of 75.70 can result in the local unit declining to 76.
On the other hand, if INR manages to breach 74.85, there will be good chance for it to rally towards the resistance at 74.65.
Outlook
While the FPI inflows are encouraging, there are other factors like higher crude oil price, strong dollar and rising US treasury yields that can continue to suppress the Indian currency. Technically too, INR is in a downtrend and remains below the important level of 75–74.85. Considering these factors, the rupee can be expected to drop to 75.60 and possibly to 75.70 in upcoming sessions. We cannot rule out the possibility of the rupee hitting 76 in the coming weeks.
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