The rupee got a temporary reprieve last week when Federal Reserve Chairman Ben Bernanke decided against tapering the asset purchase programme, just yet. The wave of cheer generated by this decision made the rupee move to the peak of 61.6 last Thursday.
But the optimism was short-lived as the Reserve Bank of India Governor Raghuram Rajan decided not to play to the gallery and raised the repo rate by 25 basis points to rein in inflation. The rupee retreated after this surprise rate hike. The reduction in marginal standing facility rate by 75 basis points to 9.5 per cent and reduction in minimum daily maintenance of the cash reserve ratio from 99 per cent to 95 per cent were, however, construed as positive for the banking sector and liquidity in the system. These measures prevented a sharper erosion in rupee value.
Foreign institutional investors were net buyers in the past week; they bought $10.6 million in debt and $925.5 million in equity.
DOLLAR INDEX
The dollar index has dropped below its important support at 81. It can test the next support at 79.8-79.6 now. A break below 79.6 will be negative for the index and can take it further lower to 79.
DOLLAR-RUPEE OUTLOOK
For the short term, rupee has support near 63 and resistance near 62. The short-term outlook will remain cautious as long as the rupee trades below 62. Inability to move above this level will imply that the currency can decline to the 64.0-64.3 zone. Target on breach of this level is 65.
Given the weak macro outlook, a test of 65-level looks likely. However, 65 is a very critical medium term support for the rupee.
While reversal from 65 can take the rupee to the 60-59.5 levels, breach of this level (65) would open the doors to revisit the previous low of 68.85.