CURRENCY CALL. Pressure mounts on the rupee

The rupee, which was stuck in a narrow range between 63.85 and 64.33 over the last several weeks, fell sharply and broke below 64.33 against the dollar last week. The currency fell to 65.16, its lowest since April.

Though it managed to claw back from this low to a high of 64.73, the rupee lost momentum again and reversed lower to close at 65.12 on Monday, down 1.5 per cent for the week.

A combination of both global and domestic factors triggered this sharp fall in the rupee last week.

The outcome of the US Federal Reserve meet on Wednesday was the first trigger that impacted the rupee. The Fed, in the meeting, confirmed its intent to begin its balance sheet normalisation in October.

It also raised the growth forecast for this year to 2.4 per cent from 2.2 per cent projected earlier. The dollar index surged as a result of this projection from around 91.5 to 92.7. Though it has come off from this high, it is managing to sustain above 94. Key resistance is at 92.80.

A strong break above it can take the index higher to 93.35 initially. Further break above 93.35 will see the rally extending to 94.20. But inability to break above 92.80 can drag the index lower and keep it range-bound between 91 and 92.80.

The dollar index will come under renewed pressure if it declines below 91. In such a scenario, it can fall to 90.3.

The news that the Centre is planning a stimulus package piled further pressure on the rupee. The fiscal deficit can widen on the back of the stimulus, thereby, weighing on the currency.

The country’s fiscal deficit stood at ₹5.05 lakh crore as of July. This is 92.4 per cent of the estimated deficit of ₹5.46 lakh crore for the current fiscal (2017-18).

Following weak first quarter growth numbers, the government’s stimulus plan is increasing the concerns surrounding the economy; a negative for the rupee from a long-term perspective.

The Indian economy grew at 5.7 per cent in the first quarter of this fiscal, down from 6.1 per cent growth recorded in the previous quarter.

Another domestic factor that could keep the rupee under pressure is the sell-off in the equity market. Foreign portfolio investors (FPIs) are on a selling spree and have sold over $3 billion in Indian equities since the beginning of August.

Though the FPIs remain net buyers of Indian debt, the pace of buying has come down sharply this month. They bought just $691 million in Indian debt so far in September after having bought over $3 billion on an average in each of the previous six months.

The short-term outlook for the rupee is negative as the currency has declined decisively below the support at 64.70. This level may now act as a strong resistance for the currency.

Immediate support is at 65.20, which is likely to be tested in the near term. A strong break below 65.2 can take the rupee further lower to 65.50 or 65.60.

The downside pressure will ease only if the rupee breaks above 64.7 again.

Such a break can see the rupee recovering to 64.5 and 64.3 levels. But as long as the currency stays below 64.7, the possibility is high of the rupee weakening to 65.8 or even 66.2 over the medium term.

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