The market drivers of the dollar (USD)-rupee (INR) are now playing out in such a way that they are against the domestic currency. The sell-off by the FPIs (Foreign Portfolio Investors) is huge. The net FPI outflows in June so far is $2.8 billion. The Indian basket of crude oil hit a decade high of $121.28 a barrel last week. The Wholesale Price Index (WPI) inflation at 15.88 in May is at a new high and the May Consumer Price Index (CPI) inflation, although it has cooled to 7.04 per cent, is higher than the RBI’s targeted range. Moreover, the dollar continues to gain strength as participants are now discounting a 75 bps hike in interest rates by the US Federal Reserve today as US inflation hardened to 8.6 per cent in May.
Nevertheless, it may be surprising to find that the Indian rupee (down by nearly 0.5 per cent) is the second best performing Asian currency against the greenback after the Hong Kong dollar, which is flat so far in June. The reason could be that the RBI is preventing a sharp fall in the rupee. However, given the bleak fundamentals, the rupee could depreciate further, gradually if not swiftly. The local currency hit an all-time low of 78.28 on Monday before recovering and closing at 78 on Tuesday. Year-to-date, India’s rupee has fallen 4.7 per cent versus the dollar.
The rupee broke the range of 77.50-77.80 on the downside on Monday and hit a record low of 78.28. This has turned the outlook for the rupee weak. Currently hovering around 78, it is likely to depreciate to 78.30. There is a possibility for it to touch 79 in the near-term. On the other hand, if the INR recovers from here, the upside can be capped by the barriers at 77.80 and 77.50. A recovery beyond 77.50 is less likely.
The dollar index (DXY) bounced off the 50-day moving average at 101.4 in early June and it is currently trading around 105. On Monday, it surpassed the prior peak of 105 to hit a new high of 105.28. Chances are high for the rally to extend in the upcoming sessions. On the upside, the potential near-term resistances are at 106 and 107.
The outcome of the Fed meeting on Wednesday could be the biggest driver of the USDINR currency pair this week. The market is preparing itself for a 75 bps hike. Moreover, other factors like FPI outflows, elevated crude oil prices and their consequent impact on the trade balance is likely to keep the rupee off balance. Overall, we expect the Indian currency to weaken from here, and it could possibly drop to 79 soon. And 80 is not far off.
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