The rupee has been vacillating in a range between 54 and 55 over the last two months. Within this range, the currency has rallied from the low of 54.9 to 53.8 against the dollar since April 5. This was mainly due to expectation of policy rate cut in the RBI’s monetary policy meeting scheduled on Friday.
The sharp decline in crude prices since mid-February is another factor aiding the short-term bullishness in rupee. Brent crude futures are down 10 per cent since February though prices are in a nascent uptrend over the last two weeks. Demand for dollars from oil importers is acting as a counter force to this uptrend.
Strength in equity market supported by portfolio inflows from foreign investors is another conducive factor. Rupee also got a leg up on Tuesday on the proposal that withholding tax on interest income paid to foreign and qualified foreign investors is to be reduced to 5 per cent from 20 per cent. Reports that regulations on money flow through offshore tax havens are likely to be eased also helped.
The dollar index has been sliding lower from the peak of 83. The index is now nearing its support at 81.7. Decline below will drag it to 81 or even 80.6.
The Euro is moving in a narrow band between 1.3 and 1.32 against the dollar. The medium-term trend in this currency has been up since the trough formed on April 4. But the hump between 1.32 and 1.33 needs to be surpassed before it can make progress.
Dollar-rupee outlook
The rupee faces key medium-term resistance at 53.7. As long as the currency trades below this level, the medium-term outlook stays negative with the possibility of a decline to 55.1 or 56 in the months ahead. But rally above 53.7 will mean that the currency can rally higher to 52.8.
The currency will need to strengthen above this level to take it towards the key long-term resistance at 52.1. The trading band for the Indian currency for the rest of this year is likely to be between 52 and 56 and it is hard to envisage a break above 52 this calendar year.
USD INR futures
This contract reversed lower from the peak of 54.6 formed on April 29. Supports exist at 53.8, 53.3 and 53.1. Traders can hold their short positions with stop loss at 54.3.
Subsequent resistances for the contract are at 54.6 and 55.2.
EUR INR futures
The Euro-rupee generic futures contract also reversed lower on Tuesday. The contract has support at the level at which it is currently poised. Break below can drag it to 70.3 or 69.8. Traders can hold their short positions with stop loss at 71.