News Analysis

Rising oil, widening CAD weigh on rupee

Gurumurthy K BL Research Bureau | Updated on December 11, 2018 Published on December 10, 2018

The strong upmove in the Indian rupee that has been in place over the last few weeks came to a stop in the past week. The currency continued to trade below 70 all through last week. A sell-off in the equity markets, coupled with a recovery in oil, kept the Indian rupee under pressure last week.

The Indian benchmark indices tumbling about 2 per cent on Monday dragged the Indian rupee below 71 to make a low of 71.44. The currency recovered slightly from this low, closing at 71.33 on Monday, down 1.2 per cent for the week.

Data from the RBI showing that India’s current account deficit (CAD) expanded to $19.1 billion (2.9 per cent of GDP) in the second quarter of this fiscal, from $6.9 billion (1.1 per cent of GDP) in the same quarter last year, also weighed on the currency.

The Organisation of the Petroleum Exporting Countries (OPEC) deciding to cut production saw WTI Crude oil prices surging 8 per cent from $50 per barrel to $54 per barrel towards the end of last week. Oil prices have come off slightly and is currently trading around $52.5 per barrel.

Prices have been oscillating between $50 and $55 over the last couple of weeks. The inability to decline below $50 leaves the possibility high of oil prices recovering further in the coming weeks. The daily chart also indicates formation of a double-bottom reversal pattern.

As such, if the WTI Crude oil breaches $55 decisively, there is a strong likelihood of the prices rallying to $58 and $60 thereafter. Such an upmove in oil may drag the rupee further lower from current levels.

Gear up for volatility

The sudden resignation of RBI Governor Urjit Patel, coupled with the results of the key State Assembly elections on Tuesday, are likely to keep volatility high in the market. The currency is likely to open with a wide gap-down on Tuesday as a result of the RBI Governor stepping down suddenly.

Rupee outlook

The near-term outlook has turned negative for the Indian rupee. A key near-term resistance is at 71.10. As long as the rupee trades below this hurdle, there is a strong likelihood of it falling further in the coming days.

Significant supports are at 71.44 – the 38.2 per cent Fibonacci retracement level, and at 71.56 – the 100-day moving average. If the rupee manages to recover from these supports, an upmove to 71.10 is possible in the near term. But a strong break below 71.56 will see the currency depreciating towards 72 and 72.4 in the near term. A strong break and a decisive close below 72.4 can drag the currency further lower to 73 thereafter.

The currency will regain its bullish momentum only if it breaks above 71.10 decisively. In such a scenario, the rupee can move up again towards 70.5 and 70 levels. But such a strong upmove looks less probable at the moment.

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