The rupee (INR) depreciated by 1 per cent against the dollar (USD) on Tuesday to close at 82.62. The domestic currency is also one of the weakest Asian currencies as it is down by nearly 11 per cent year-to-date.

Notably, the rupee has lost nearly 2 per cent in the past few sessions. This is despite India receiving good foreign inflows as the stock market indices are trading at elevated levels. According to the NSDL (National Securities Depository Limited) data, the net inflows in November stood at $4.1 billion. For this month, it has already crossed a billion dollars. Also, the crude oil price and the dollar are trading at lower levels.

The increasing foreign reserves might give us some explanation. As per the Reserve Bank of India (RBI) data, the total reserves now stand at $550 billion compared to $525 billion on October 21. This indicates that the central bank might be buying dollars.

Also, some of the market experts are of the opinion that the RBI is likely to maintain a dovish tone on Wednesdayon softer inflation outlook. This weighed on the rupee especially given the fact that the US Fed is not yet done with their hike cycle. This also led to a sharp fall in the forward premiums in the onshore market. According to Bloomberg data, the fall in 12-month forward premium is the biggest in the last 15 years.

Chart

The rupee has been on a decline since the calendar turned December. On facing the resistance at 81, the local unit fell sharply. It closed at 82.62 on Tuesday. Although INR might see a minor upside, possibly to 82.20, it will most likely fall further, and it might even retest the prior low of 83.29 in the short-term. But in case the rupee manages to rally past 82.20 and move above 82, we might see a sideways trend between 81 and 82.

The dollar index (DXY) is trading at 105.25. It is currently trading below the 200-day moving average, giving it a bearish bias. Only a move above 106 can give the dollar bulls some hope. On the downside, the nearest support is at 104.

Outlook

Weak dollar and good foreign inflows are certainly good for the Indian currency. However, for the short-term at least, the expectation of the RBI taking a dovish stance in the upcoming meeting and the certainty that the Fed is going to hike further, albeit at a lower pace, the rupee might be under downward pressure. It might test the previous low of 83.29 before the end of the year.

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