The rupee is keeping policymakers on tenterhooks by continuing its stubborn slide even as the Reserve Bank of India and Government are trying various ways to curb speculation and lure foreign funds into the country. The latest central bank action to control rupee volatility was directed at reducing the liquidity available to the banking system and making short-term credit to banks more expensive. This move led to a spike in 10-year government bond yields to 8 per cent and a slump in equities. There was, however, a more muted response from the forex market, with the rupee moving just a step higher to 59.3 against the dollar.

But it is doubtful if this bout of strengthening will sustain.The RBI had clamped down on currency trading in both the inter-bank market and stock exchanges in the second week of July. While this move did peg back the volumes on the exchanges, the rupee continued to hover around the 60 mark.

The macroeconomic releases over the past fortnight have been far from helpful to the currency. While imports in June declined, so did exports, resulting in only a marginal dip in the trade deficit. Industrial production for May contracted 1.6 per cent and consumer price inflation was higher than expected at 9.87 per cent in June. Wholesale price inflation too increased to 4.87 per cent in June.

Foreign institutional investors have pulled out $928 million out of the equity market so far this month. Their net debt sales were $1.6 billion, maintaining pressure on the Indian currency.

The dollar index, which was threatening to move beyond 85, slumped to 82.4 on July 11, giving some respite to the rupee. Immediate support for this index is at 82.4. Recovery from here will mean that the index can move higher in the weeks ahead.

Dollar-rupee outlook

The rupee hit a low of 61.2 on July 8 before reversing higher. This appreciation has brought the currency close to its near-term peak at 58.9. Key short-term hurdles for the rupee that we need to watch now are at 58.7 and then at 58.3.

If the rupee continues to trade below these levels, it will mean that the currency will move sideways in the 58.3 to 61 range for few more weeks before attempting to move lower, below 61.2.

But strong close above 58.3 will mean that the currency is on its way to 57.4 or 56.5. It, however, seems quite unlikely that the rupee will be able to rally beyond 58.3 just yet.

USD-INR futures

These contracts moved down from the peak of 61.52 to 59.1 on Tuesday. It has support around 59.2. The contract closed around this level on Tuesday. Investors with a greater penchant for risk can buy the contract with stop loss at 59.1.

It may attempt to move higher to 60, 60.3 or 60.6 in the sessions ahead. Those who like to play it safe can wait for a close above 60 before going long.

Support on a decline below 59.1 is at 58.3.

Related Topics