The rupee hit a record low of 78.86 on Tuesday before closing at 78.78 against the dollar. Thus, it lost about 0.5 per cent yesterday. Several reports cite that the major reason for the depreciation on Tuesday was due to unwinding of large open interest (OI) positions in USD-INR futures, that expired on Tuesday (June contract), by the Reserve Bank of India. Those OI were created by selling USD-INR futures, meaning buying rupee in the futures market. When these positions are liquidated, it is bound to impact the rupee negatively.
At the same time, there are chances for the RBI to build fresh rupee longs in July expiry and this can probably arrest further decline from here. At least the pace of fall will be slower.
Other factors like continued foreign portfolio outflows and elevated crude oil prices have been weighing on the rupee for quite some time and this is likely to stay so. As per the latest National Securities Depository Limited data, the net FPI (foreign portfolio investors) outflows in June stands at $6 billion. Brent crude futures, which dropped below $107 last week, has now risen back to $112.
Charts too, are indicating a bearish outlook for the rupee.
The rupee, which was moving in the tight range of 78–78.10, breached the support at 78.10 last week. It also dropped below another support at 78.40 on Tuesday and marked an all-time low of 78.86 before ending the session at 78.78. The price action shows a clear bear trend in the rupee and given the current momentum, it can be expected to touch 79 soon. Even 80 may not be that far off.
On the other hand, if there is a recovery, it will face hurdles at 78.40 and 78.10. A rally beyond 78.10 in the near-term is not likely.
The dollar index (DXY), of late, has been moving in a sideways trend. It is now fluctuating between 103.70 and 105. The breach of this range can tell us the direction of the next leg of trend. Yet, the overall trend is bullish and even if it falls below 103.70, a decline below 102.50 might not happen anytime soon.
Although the dollar has been flat, the FPI selling and the elevated crude oil prices are weighing on the rupee. Technically too, the bias is bearish and the probability of further fall looks high. But the RBI, sitting on huge reserves, might support the rupee. Nevertheless, the rupee is expected to hit 79 in the near-term and before the end of the year, it could even touch 80.