Rupee exhibits signs of reversal

The Indian rupee is finally showing some signs of relief. The crucial support region of 74.50-74.60, highlighted in this column over the last several weeks, appears to have halted the current fall in the currency. The Indian rupee made a record low of 74.48 on October 11, and has reversed higher since then. The currency has appreciated 1.8 per cent from the record lows and made a high of 73.19 on Monday. The currency, however, has come-off slightly from this high, and closed at 73.56, up 0.35 per cent for the week.

Oil prices ease

Crude oil prices falling about 8 per cent over the last two weeks has helped ease the pressure on the rupee. The Crude Oil futures contract on the NYMEX has fallen sharply from around $75 per barrel two weeks ago to $69 per barrel currently. . As long as the contract remains below $71, there is a possibility of the prices falling to $67 in the coming days.

Another factor that could have been behind the recent recovery in the rupee could be the RBI’s intervention. The central bank’s latest data show that the RBI has off-loaded $5.14 billion from the forex reserves in the week that ended October 12.

This has been the highest draw-down in the reserves in a single week since November 2011. It also gives a hint that the RBI could be intervening to arrest the sharp fall in the rupee.

Also, if the oil prices reverse higher again and if the sell-off in equities intensifies going forward, then it may overshadow the impact of the RBI’s intervention in the rupee. In such a scenario, the strength in the rupee could be capped.

Foreign Portfolio Investors continuing to sell in the Indian debt and equities is another factor that could play spoilsport to the rupee’s recent upmove. FPIs have been net sellers in debt for the 10th consecutive week. They sold $477 million in the debt segment last week. For October, they sold $1.65 billion in the debt and $2.7 billion in the equity segment so far. The sell-off in the equity segment has been intensifying over the last few weeks. If FPIs continue to sell, the strength in the rupee may wane.

While the above mentioned fundamental factors signal mixed cues on the rupee’s recent recovery and its sustainability, the outlook on the charts is relatively positive. The price action on the charts leaves the possibility high for the rupee to strengthen further over the short-term. Key near-term supports are at 73.70 and 74.10. The bullish outlook will get negated only if the rupee declines below 74.10 again. Also, a fresh and sharp fall is likely only if the currency breaks decisively below the 74.50-74.60 support region. Such a fall looks less probable at the moment.

As such, the rupee is likely to test next key resistance level of 72.9 in the coming days. Inability to break this hurdle in the first attempt can drag the rupee lower to 73.5. But an break above 72.9 will see the rupee appreciating to 72 and 71.8 against in the coming weeks.

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