Rupee recorded an extremely steep decline against the dollar in the last fortnight, crashing from 55.6 to a new life-time low of 58.98 on Tuesday. This decline is a continuation of the decline that began in the first week of May on fears that the Federal Reserve will halt its bond-buyback programme soon. The rupee is down more than 8 per cent from the peak of 53.7 recorded on May 2.
The recent bout of selling on Monday was triggered by data showing exodus of foreign institutional funds out of emerging market bonds including India. The sentiment towards the Indian currency improved only after the Reserve Bank of India indirectly intervened in the forex market on Tuesday, pulling the currency back from the brink of crossing below the 59-mark.
The RBI’s move to clamp down on gold imports by increasing the import duty on the yellow metal from 6 to 8 per cent and laying down that gold imports should be restricted to meet the demand of the exporters alone, did not do much to assuage the negative sentiment in the rupee last week.
The dollar index has also been moving lower since the beginning of this month and is currently placed at key support at 81. A reversal is possible from these levels. The sovereign rating on US being revised from negative to stable by Standard and Poor will also usher in stability in the dollar.
Dollar rupee outlook
The rupee’s dash below its previous life-time low at 57.3 warrants another look at the medium and long-term trend in the currency. The long-term trend in the currency has been down since the July 2011 peak at 43.8. One leg of this down-move ended at 57.3 last June. What followed was a long-drawn consolidation phase that breaks in to a perfect triangular formation of 3-3-3-3-3.
The break-out of this pattern has happened on May 2. Minimum targets for the current down-move as per this count is 59.22. The rupee almost achieved this target on Tuesday. Let us hope this is the medium-term trough for now. If this level does not hold, a 1:1 extrapolation gives us a scarier level of 67.1.
Immediate resistance for the currency in the weeks ahead will be between 56.9 and 57.3. As long as a firm close above this level is not recorded, the Indian currency will stay under pressure.
Continuation of the down-move in the days ahead will take the currency to 59.22 or 60.8.
USD INR futures
This contract moved in line with our expectation, but far surpassed our target by hitting the high of 59.1 this week. Short-term supports are at 58.1 and 57.5.
Short-term traders can hold the contract as long as it trades above the first support. Rebound from here can take the contract higher to 59.1 and then 59.7.