The rupee gained 0.7 per cent against the dollar over the past week despite weak industrial production data that was down 0.1 per cent in November 2012 from a year earlier. Exports also continued to be a cause for concern, declining for the eighth consecutive month. Exports declined 1.9 per cent in December while imports grew 6.3 per cent.

But a lower Wholesale Price Index (WPI) helped improve sentiment in the Indian currency. WPI, which is the country’s main gauge for inflation, fell to a three-year low of 7.18 per cent in December 2012. Raising expectations that the RBI may go for a rate cut in its monetary policy review meet on January 29.

The RBI introduced swap facility for expansion of export credit. Under the scheme, banks can buy US dollars up to the eligible swap limit from the RBI and sell the same amount of dollars at the prevailing market rates for swaps of a similar tenor. The move aims to arrest depreciation in the rupee. Demand from exporters and higher FII inflows also supported the rupee. For the week, FII’s invested Rs 3,831 crore in stocks.

One-month implied volatility, a measure of expected moves in exchange rates that is used to price options, increased by 28 basis points to 9.83 for the week.

Three-month onshore rupee forwards were at 55.61 a dollar and offshore non-deliverable contracts were at 55.49 a dollar on Tuesday compared to 55.92 and 55.85 respectively last week.

Asian currencies gained on Japan’s $116 billion stimulus package and a rebound in China’s exports raising hopes that the global economy is in a recovery mode. The Euro gained 2 per cent against the dollar for the week and the dollar Index, which tracks the greenback against currencies of six US trading partners, gained 0.8 per cent to 79.64.

Technical Analysis

Dollar-rupee outlook : The USD-INR pair moved higher over the past week to hit the high of 54.3 on Tuesday. As indicated in our last column, the currency pair reversed from the support at 55.45 to move below 54.5. Next upward target for the pair is 54.

The short-term trend for the pair is sideways in the band between 54 and 55.45. Since this move follows a rally from the low at 55.9, we can expect the currency to move higher to 54.2 or 53.5 over the weeks ahead.

If the currency is unable to strengthen beyond 54, it can remain in the band between 54 and 55.4 for few more weeks. Target beyond 53.5 is 53.1. The currency pair needs to rally beyond this level before the medium-term outlook to turn positive.

USD-INR futures : The USD-INR contract moved in line with our expectations, declining below 54.7 over the past week. The down-move is however losing momentum and the contract is likely to move higher to 54.9, 55 or 55.15 in the sessions ahead.

Target on decline below 54.48 is 54.24.

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