CURRENCY CALL. Short-term outlook for rupee remains bullish

The revival in risk appetite after the US Federal Reserve meeting last week has helped the rupee to gain ground. The outcome of the Fed meet indicated that there may be only two possible rate hikes this year as against the four rate hikes expected in December.

This helped the rupee breach its important resistance at 67 and strengthen to 66.42 on Monday. However, the currency ceded some of its gains thereafter and fell back to 66.93 before closing at 66.64 on Wednesday, up 0.9 per cent for the week.

Fed to go slow Pointing to the global financial and growth situation, the US Federal Reserve lowered its 2016 growth forecast for the US to 2.2 per cent from 2.4 per cent. This coupled with the impact of lower energy prices and slowdown in US exports has led the Fed to revise its target interest rate to 0.9 per cent in 2016 from 1.4 per cent projected in December. This leaves the possibility of only two rate hikes this year as against the four anticipated after its December meeting.

However, the Fed left the door open to change its stance in the upcoming meetings if the global situation improves.

The Fed deciding to go slow in hiking the rates saw the US dollar index plummeting over 2 percentage points from 97 to 94.65. However, the index has recovered thereafter and is currently trading near 96.20. If it can sustain above 96, then the index can extend its rise to 96.5 and 97 in the coming week. The level of 97 is a strong resistance and only a strong break above this level mitigate the risk of further fall in the index. An inability to break above 97 could keep the index within a 95-97 range for some time.

FPIs pour money The increase in foreign money inflows is also supporting the rupee. Foreign portfolio investors have been on a buying spree, especially in the Indian equity segment. They bought $919 million in equities in the past week; this segment has seen a strong inflow of $2.15 billion in just three weeks.

In the debt segment, FPIs bought $560 million in the past week. If this trend continues, then the Indian stock indices can surge higher which in turn can help the rupee gain further strength.

Rupee outlook The bounce from the low of 66.93 on Wednesday is positive for the rupee. It suggests lack of fresh selling interest in the market that could have pushed the rupee below 67 in the near term. This keeps the short-term outlook bullish for the currency. It can strengthen to test 66 in the coming days.

However, the rupee’s strength is likely to be limited to 66 as this level is a strong channel resistance. It has been moving in a bear channel since 2014. This channel resistance is poised near 66. Also, the 200-day moving average is placed around 66. This makes this level a strong resistance and the chance of the rupee strengthening beyond 66 looks unlikely.

A sharp reversal from here will keep the medium-term bearish outlook intact. Such a reversal could trigger a fresh leg of down-move targeting 68 and 69 levels once again.