Currency Call. Rupee could extend its fall in short term

The Indian rupee was volatile in the past week. After opening almost flat and amidst lacklustre trading near 61 to a dollar levels early in the week, the rupee fell in the latter part of the week, tumbling to 61.61 on Friday.

This was due to a sell-off in the Indian equity market and the overall strength of the dollar. However, the decision by global credit rating agency Standard and Poor’s, to revise the outlook for India to stable − from negative − helped the rupee recover some of its losses on Friday afternoon and close the week at 61.16, down 0.54 per cent.

This week is a truncated trading week and the Indian financial markets are closed on Thursday and Friday. Volatility is expected to remain high as the week is packed with a series of important events, starting with the RBI’s monetary policy meeting on Tuesday.

Even though a rate cut is not expected due to elevated levels of food inflation, the RBI’s comments on the inflation outlook will be closely watched. HSBC’s manufacturing Purchasing Managers Index (PMI) data is due on Wednesday and balance of payments data is also expected this week.

The sell-off by foreign portfolio investors (FPIs) in both the debt and equity segments in the latter part of last week is a key point to note. The rupee could remain under pressure this week if the sell-off continues. The FPIs bought $68.66 million in debt and sold $308 million in equity last week.

The dollar index (85.64) surged, breaking its important resistance at 85. It closed strong for the week and the bullish outlook remains intact. The index can test 86 this week and a strong break above 86 will take the index to the next target of 87.3. The euro (1.2678), the major component in the dollar index, fell 1.1 per cent last week. The outlook for the currency is bearish and it could fall to 1.25 immediately.

Also, there is a big danger of the euro tumbling to 1.21 levels over the medium term, which is a positive for the dollar index. The fall below 61 last week is significant, as it has reduced the immediate chances of the rupee gaining strength. This level will be a key and psychological resistance for the currency this week.

The outlook is bearish as long as the rupee trades below 61. A fall to 61.4 and 61.6 looks likely this week. A further break below 61.6 could see the rupee weaken to 61.9 in the short term.

The bearish outlook for the rupee will get negated only on a break above 61, which could take the rupee higher to 60.85 and 60.65 in the short term. In the medium term, 62 is a key support. A strong breach could see the rupee fall further to 63. On the other hand, the rupee could regain strength and target 61 if it reverses higher from 62.

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