CURRENCY CALL. Rupee stuck in a narrow range

After the weak start to the New Year, the rupee spent the second week consolidating sideways. The Indian currency has been stuck in a narrow range between 66.59 and 66.97 over the past week. It closed on a flat note at 66.85 on Wednesday, but falling oil prices and China worries continue to keep the sentiment edgy.

On the domestic front, two major data releases in the past week — the Consumer Price Index (CPI) inflation and the Index of Industrial Production (IIP) — were weak. The CPI rose to 5.61 per cent in December, from 5.41 per cent in November.

Surging inflation has reduced the chances of any further interest rate cut by the Reserve Bank of India.

Also, the trend in inflation is signalling a reversal. There is a danger of inflation moving higher to 6.5-7 per cent in the coming months. Industrial production contracted 3.2 per cent in November after expanding at a faster pace of 9.87 per cent in the previous month.

Following the weak CPI numbers, the Wholesale Price Index (WPI) inflation numbers will be released on Thursday. The trade (export-import) data is also due for release in the coming week.

The dollar index (99.20) has surged in the past week from a low of 98.25. Immediate resistance is at 99.5.

A strong break above this hurdle can take the index higher to 100 initially or even to 100.5 thereafter. In such a scenario, the rupee could come under pressure and fall below 67.

The short-term trend in the rupee is indecisive. A breakout on either side of the current range (66.59-67) will decide the next leg of the move for the currency. A break above 66.59 can take the rupee higher to 66.35.

Further break above 66.35 can see the currency strengthening to 66.20. For the rupee, 66.2 is a significant resistance.

The short-term outlook will turn bullish only on a strong break above 66.2. The next targets will be 66 and 65.35.

On the other hand, a decisive fall below 67 in the coming days can increase the pressure on the rupee. In such a scenario, the currency can decline to 67.2 and 67.3 immediately. It will also open the doors for a fall to 67.45 in the short term.

Also, as mentioned in this column last week, a strong break below 67 will strengthen the medium-term downtrend. Such a break will increase the danger of the rupee declining to 68 or even 68.3 over the medium term.

Remember, the rupee has been moving within a bear channel since mid-2014. The channel resistance is poised at around 68.3-68.5. A fall to test this channel resistance in the coming weeks over the medium term cannot be ruled out.