Currency Call. Domestic woes weigh on the rupee

The volatility in the Indian currency market has increased over the last few weeks. Thanks to the global weakness in dollar, the Indian rupee, which opened on a weak note at 63.70 on Monday, recovered from the low of 63.77 to touch a high of 63.11 by Tuesday. However, the recovery did not sustain for long.

Uncertainty regarding the applicability of Minimum Alternate Tax (MAT) on capital gains made by foreign companies that triggered a sharp sell-off in the Indian equity market had a negative impact on the rupee.

As a result, the rupee weakened to 63.725 before closing at 63.42 on Thursday, up 0.22 per cent for the week. The currency market, which was closed on Friday, is closed today (Monday) too. The chances of a huge gap opening in the rupee when the market opens on Tuesday after a long weekend remain high.

The fall in the rupee last week came as a surprise as the greenback was trending lower following weak GDP data and growth concerns raised by the US Federal Reserve. Preliminary data release showed that the US grew at a sluggish 0.23 per cent in the first quarter of 2015, much lower than the 2.2 per cent growth seen in the last quarter of 2014. All these led the dollar index to tumble from 97 levels earlier in the week to a low of 94.4. Concerns over the growth slowdown may prompt the Fed to postpone a rate hike, given that the Fed has refrained from giving any indication about the timing of commencement of rate hikes.

The outlook for the dollar index (95.21) is negative. It has a strong resistance in the 96-97 zone. Though these levels may be tested in the coming week, an immediate break above 96-97 might not be easy. The index may remain range-bound between 95 and 97 for some time. A strong break below 95 will be bearish and can trigger a fall to 94 and even lower.

The key data releases for the week one needs to watch for are the US trade data on Tuesday and the unemployment numbers on Friday. Given that the Federal Reserve has already expressed concern over the recent fall in US exports, weak exports data can take the US dollar further down. The other important global event to watch for this week is the UK general election on Thursday.

Back home, HSBC’s Manufacturing Purchasing Managers Index (PMI) which will be released today and HSBC’s Services PMI to be released on Wednesday are the key macro economic data releases to be watched this week.

The movement in the Indian rupee is now being influenced largely by domestic factors. The sharp sell-off in the Indian equity market as foreign investors continue to pull money out of India is keeping the rupee under pressure. Though the Indian government last week clarified that some income categories (of foreign investors) will be exempt from the Minimum Alternate Tax, failure to repeal the retrospective tax on these categories may be a cause of concern for foreign investors. The Indian equity market witnessed a net outflow of $724.5 million last week, for thefirst time since February.

A sustained sell-off by foreign investors can put further pressure on the rupee, even if the US dollar weakens further.

The recent surge in crude oil price may also have a negative impact on the rupee. The Brent Crude ($66 per barrel) price has gained 21 per cent in the last one month. With the short-term support at $63, the chances that oil may rise further to $72 or even $80 in the coming months remain strong. Data from the Petroleum Ministry shows that India’s crude basket price has increased 21 per cent in February to $56.43 per barrel. Further rise in the oil price may not only hurt the country’s import bill but also weaken the rupee.

The reversal from last week’s high of 63.11 is negative for the rupee. Key resistances are at 63.15 and 63. The probability of the rupee strengthening further to 63.15 remains high. But in the short term, it is expected to hover around its immediate hurdle of 63. A reversal from 63.15 will see the rupee further weaken to 63.7. Key support is at 63.9. A fall below this level can drag it lower to 64.15. It is likely to gain strength only if it breaks above 63. Such a break can take the rupee higher to 62.5 in the short term. However, a strong up move seems unlikely in the short term.

In the medium term, 64.15 is a crucial level to watch. A decisive fall below this level will see the rupee tumble to 64.85 and 65. Such a fall can increase the bearish momentum and drag it further down to 66 or even lower.

On the other hand, failure to break below 64.15 may provide some respite in which case the rupee could strengthen to 63 or even 62.5.

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