Currency Call. Pressure mounts on rupee

The rupee fell over a per cent in the past week breaking below the key short-term support level of 65.2.

The currency has been trading weak all through the week. It fell to a low of 65.54 on Tuesday and recovered slightly from there to close the day at 65.42, down 1.13 per cent for the week.

Crude surges The recent rally in crude oil prices has put renewed pressure on the rupee. Brent crude prices surged breaking above the psychological $60 per barrel mark last week for the first time since July 2015.

The Brent Crude futures contract touched a high of $64.65 and has come off slightly from there. Oil prices have jumped by about 30 per cent from the low of around $44 a barrel in June to $63/barrel levels currently.

Deficit widens High oil prices would increase the country’s import bill which, in turn, would widen the trade deficit. This is negative for the currency. Data released on Tuesday showed that oil imports in October increased by about 28 per cent (year-on-year) to $9.29 billion. The trade deficit, on the other hand, widened to $14 billion in October from $11.13 billion in the corresponding month last year.

If oil continues its uptrend, it will keep the rupee’s strength under check and drag the currency further lower.

Sell-off by FPIs After being net buyers of Indian debt for five consecutive weeks, foreign portfolio investors (FPIs) turned sellers in the past week.

FPIs sold $525 million in Indian debt in the past week. The sell-off in the debt segment has overshadowed the impact of the $1.1 billion purchase made by FPIs in the equity segment last week. The pressure on the rupee might intensify if the FPIs continue to sell more debt in the coming weeks.

The dollar index has dropped after hitting a high of 95.15 last week. It is currently trading at 94.30. The near-term outlook is weak and the index can dip to 93.85 or 93.75 in the near term.

However, 93.85-93.75 is a strong support region for the index, which is likely to halt the fall. An eventual upward reversal thereafter can take the dollar index above 95 and towards 96 and 96.5. Such a rally in the index might see the rupee weakening towards 66 or even lower in the coming weeks.

Rupee outlook The strong fall below 65 last week has strengthened the bearish outlook on the rupee. The region between 65.20 and 65.15 is a key near-term resistance which can limit the upside in the near term.

Immediate support is at 65.55 which is holding well as of now. If the rupee manages to sustain above this support, an intermediate bounce to 65.20 or 65.15 cannot be ruled out. However, further rise breaking above 65.15 is less probable.

An eventual break below 65.55 will increase the likelihood of the currency falling to 66 or even 66.25 in the coming weeks.

The near-term view will turn positive only if the rupee manages to break above 65.15. The next targets are 65 and 64.85. But such an upmove looks less likely at the moment.

COMMENT NOW