As the dollar (USD) declined, the rupee (INR) made considerable gains over the past week. The weakness in the greenback could persist and so, the local currency could retain the positive bias in the short term. The year-to-date loss of INR against USD recovered over the past few sessions and it now stands at nearly 1.4 per cent.

Fed retains stance

The Federal Open Market Committee (FOMC) of the Federal Reserves of the US released statement yesterday which says the committee has decided to keep the benchmark rate unchanged and continue with $120 billion bond buying programme. However, the committee noted that the economic activity has improved and employment has strengthened amid progress in vaccination. Nevertheless, they also said the risks remain and so the policy will remain accommodative the likelihood of tapering the asset purchase anytime soon looks low. This led to dollar diving and yields firming which resulted in major currencies gaining. Rupee also became a beneficiary and it has gained about 0.4 per cent in the first hour of trade today.

FPI selling

While declining dollar is positive for the rupee, the trend of foreign portfolio investors (FPI) fund flow has not been favourable. Over the past week, the FPIs have pulled out net amount of ₹5,221 crore and equities segment remained the weakest. That is, it saw a net outflow of ₹4,973 crore whereas debt saw net outflow of ₹1,392 crore. On the other hand, net fund flow through voluntary retention route and the hybrid category stood positive i.e., ₹447 crore and ₹698 crore, respectively. Yet, the overall fund flows has been negative in the past couple of weeks weighing on the Indian currency. But the market has been showing steady gains in the past few trading sessions and this could encourage FPIs to pump in money which is positive for INR.

Crude inventories

The latest data by the Energy information Administration (EIA) shows that the crude oil inventories has gone up for the second straight week, raising worries about the demand. During the past week, inventories went up by 0.1 million barrels as against the expected drop of 0.9 million barrels. Since the amount is small, this may not have significant impact immediately but if this trend continues, crude price can come under pressure. Rupee being negatively correlated with crude oil price, a decline can be positive for the local currency.

INR-USD chart

Over the past three weeks, INR rebounded from the key support of 75.50. But this time, it has rallied past the resistance at 74.50 and today, it marked a three-week high of 74.23. The near-term outlook of INR can remain bullish until it stays above the resistance-turned-support of 74.50. The price action on the daily chart signals that INR can continue to appreciate in the upcoming sessions. The immediate resistance levels to watch out for are spotted at 74 and 73.50.

Outlook

Factors like the declining dollar and potential FPI inflows because of the recent performance of domestic equity market can be supportive for the rupee. Technically too, it looks positive as it has breached an important resistance level and the short-term trend seems to have turned bullish. These factors indicate that the rupee can gain from here and could touch 73.50 in the near term.

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