CURRENCY CALL. Budget impact on the rupee wanes

The post-Budget relief rally in the rupee may be in for a pause. The rupee rose to a high of 67.08 on Friday. But the dollar gaining strength, following weak Chinese trade data, limited the uptrend in the rupee. The currency fell to a low of 67.51 on Wednesday. It, however, managed to recover slightly from this level to close at 67.22, up 0.5 per cent for the week.

Foreign portfolio investors (FPIs) appear to be returning to Indian equities after the Budget. They have bought $857 million into equities since then. If this trend continues, then it could help limit the downside in the rupee in the short term. However, FPIs continue to remain net sellers in the debt segment, selling $169 million post-Budget. A strong outflow in the debt market can play spoiler, limiting the strength in the rupee.

As the impact of the Budget impact wanes, a series of data and events unfolding this week can influence the rupee movement. The outcome of the European Central Bank (ECB) meeting is due this evening. Any sharp sell-off in the euro can bring the rupee under pressure as well.

On the domestic front, the Index of Industrial Production data will be released on Friday. It will be followed by inflation numbers; both the Wholesale Price Index (WPI) as well as the Consumer Price Index (CPI) data. India’s trade data is also scheduled for release during the week.

The pull-back in the dollar index (97.35) from a high of 98.6 found support at the 200-day moving average near 97. The index has reversed higher from the low of 96.89. If it manages to sustain above 97, then a rise to 98 and 98.3 looks likely this week. But the index will come under pressure if it declines below 97. Such a break can drag it to 96.3 and 96 thereafter.

The outcome of the ECB meeting today could be a key trigger to decide the next leg of the dollar index movement.

The rupee has an important resistance near 67 which is holding up for now. On the other hand, significant support exists in the 68-68.25 zone. A breakout on either side of 67 or 68.25 will decide the next leg of movement in the rupee.

The short-term trend is leaning towards the positive. So, a strong break above 67 can strengthen the rupee towards 66. Inability to break above 67 will keep the currency range-bound between 67 and 68.25 for some time.

A fall below 68.25 can take the rupee lower to 68.50 and 68.75.

For the medium term, strong resistance for the currency is at 66, which is the channel resistance.

The currency has been moving within a bear channel since 2014. Therefore, a move past 66 looks less probable. However, the rupee can test this level in the coming weeks. A reversal from 66 can increase the danger of the rupee falling to 70 levels.