The rupee (INR) continued its decline over the past week as the dollar (USD) strengthened. The domestic unit slipped below 74-mark after more than a month and currently the year-to-date loss of INR versus USD now stands at nearly 1.7 per cent.
Crude oil is becoming harder challenge as it continue to weigh on the rupee since the price is steadily moving upwards. The hardening of price is expected to continue as the data released by the US Energy Information Administration (EIA) on Wednesday shows that the inventories have dropped more than expected – it reported a decline for fifth straight week i.e., a depletion of 7.6 million barrels during the last week which is considerably more than the expected drop of 3.6 million barrels. Thus, the demand seems to be picking up and so, the price is likely to rise further which can drag the local currency.
Another factor that went against the rupee last week was the foreign flows. The net inflows of foreign portfolio investors (FPIs) in June now stands at ₹13,635 crore and thus, they have pulled out about ₹860 crore over the past week. However, as per the latest Reserve Bank of India (RBI) data, the foreign exchange reserves has seen an increase towards a new all-time high of $608 billion. Higher forex reserves are good for the currency since RBI can tap these in controlling the volatility of the exchange rate of USD-INR.
Since hitting 72.30 levels in the final week of May, INR has been declining and before a week, there was a considerable drop and it fell below an important support of 74. Until the rupee trades below this level, it can remain bearish in the short-term and while 74.40 is the nearest support, a breach of this level can pull the rupee down to 74.70. However, if the rupee bulls regain traction and push it back above 74, it can appreciate to 73.80 and possibly to 73.50.
On the other hand, the dollar index has been strengthening since the beginning of June and it current stays above the key supports at 91.00 and 91.50. As long as the index stays above these levels, the short-term bias will bullish. Currently trading around 91.80, it will most probably rally past 92 and 92.40 in the coming week and could potentially touch 93 in the near-term.
Outlook
While the foreign flows can depend on how the equity markets perform, rising crude oil price is a negative factor for the rupee. Technically, the domestic currency looks weak and hence, the exchange rate can be expected to stay sideways with a bearish bias i.e., INR could hover at 74.40 with the possibility of it touching 74.70. On the upside, 74 will be a strong barrier.