Currency Call. Rupee to trade with a negative bias

It was relatively a calm week for the Indian currency market. The rupee opened flat at 62.33 and fell to a low of 62.57 on Monday before gaining ground thereafter. Weakness in the dollar helped the Indian rupee reverse higher with the dollar index falling almost 2 per cent for the week. This propped up the rupee to 62.28 by Thursday before closing at 62.33 on Friday.

A string of weak economic data releases (retail sales, industrial production and housing starts) from the US kept the dollar under pressure all through the week.

This helped non-dollar currencies gain strength and the Indian rupee also took cues from this.

However, inflation data on Friday offered respite to the dollar index, allowing it to bounce back mildly in the final sessions of the week. Core inflation in the US rose to 1.8 per cent March from 1.7 per cent the month earlier. Though inflation is nearing the Federal Reserve’s target of 2 per cent, lack of support from other economic data could stay the central bank’s hand in raising interest rates.

Domestic data Inflation and trade data were the major macro economic data releases on the domestic front last week. Both the Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation eased further in the month of March.

The WPI remains in negative territory for the fifth consecutive month. It fell to minus 2.33 per cent in March from minus 2.06 per cent in February. The CPI, on the other hand, fell to a three-month low of 5.17 per cent from 5.37 in February. Easing inflation is stoking expectations in the market for further rate cuts.

Can we expect another surprise mid-term policy rate cut from Raghuram Rajan? We will have to wait and watch.

Falling exports and the widening deficit remain a worry. India’s trade deficit in March widened to $11.79 billion from $6.85 billion in February and $10.95 billion in March last year. A sharp 25.9 per cent month-on-month (MoM) rise in imports overshadowed the 11.2 per cent rise (MoM) in exports. While the fall in oil price has eased the import bill over the last few months, the fall in exports is a concern. Exports for the month were down 21 per cent compared with last year.

The important factor to watch now is the recent rise in oil prices. Brent Crude prices currently at $63 a barrel have surged about 10 per cent last week. A strong break above $65, which looks more likely, can take oil prices to $72 and even $80 in the coming months. Such a rally could see both inflation and the import bill surging and could put the rupee under pressure.

Full convertibility? Amid all the nervousness in forex markets, there have been surprising statements from policymakers on the benefits of India moving towards full capital account convertibility.

Last week, Jayant Sinha, Minister of State for Finance, said that India will have to move towards full capital account convertibility along with initiating other policy measures in order to become one of the top three economies in the world.

A week earlier, the RBI governor said he is hoping for full capital account convertibility in the coming years. While these comments seem to have been made in the nature of an academic debate, what could full convertibility mean for markets?

Well, the rupee is already convertible for current account transactions, full convertibility would allow Indian investors to seamlessly convert domestic financial assets into dollars and remit it and vice versa.

If India remains a favoured destination for foreign investors, such a move in the future could attract higher capital flows into the country.

But the flip side could be greater impact on the rupee from global geopolitical risks and a more volatile exchange rate, as foreign currency assets move freely in and out.

Dollar outlook The dollar index (97.52) failed to breach the psychological barrier at 100 and fell in the past week. With resistance at 98, it can fall to 96.5 in the coming week. Overall, the dollar index could remain broadly in the range of 96 and 100 in the next few weeks. A break out on either side of will then decide the next trend for the index. The Euro (1.08) has bounced sharply from near 1.05. It can rise to test 1.10 in the coming week. Failure to break above 1.10 could put the euro in the 1.05-1.10 range for some time.

Rupee outlook The flat closing last week makes the immediate outlook unclear for the Indian rupee. However, the trade deficit data could put initial pressure on the currency at opening. There is a strong likelihood of the rupee falling to test its support at 62.6. Inability to break this level can see the rupee reversing higher again towards 62.4 and 62.2 levels. Key resistance is at 62.1. It is more likely that the rupee could remain range bound between 62.1 and 62.6 for some time. A breakout on either side of 62.1 and 62.6 will decide whether rupee strengthens to 61.85 or falls to 63 in the short-term.

The medium-term bearish view remains unchanged with strong resistance in the 62-61 zone. A decisive fall below 63 can drag the rupee lower towards 64 in the medium term.

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