The pressure on the rupee is mounting. The currency fell towards 66 as expected in the past week, but the pace of the fall was unexpected.
It tumbled, breaking below the key support level of 66.2 that we had expected to hold and fell to a 13-month low of 66.49; it closed around this low at 66.48 on Monday. The rupee has tumbled 1.5 per cent in the past week and this has been its highest weekly fall since January 2016.
FPIs sell-off
While the weak trade deficit data and concerns of the US adding India to its watch-list of currency manipulators had triggered the fall in the rupee the week earlier, last week it was the strong foreign money outflows in the Indian debt segment that had dragged the currency lower.
Foreign portfolio investors (FPIs) had sold $1.8 billion in the past week. On a weekly basis, this has been the highest outflow witnessed in the debt segment since December 2016.
FPIs’ selling pressure seems to be intensifying. They have already sold $1.39 billion in March.
The sell-off seems to be spilling over to the equity segment as well.
FPIs have sold over $650 million in equities over the last couple of weeks. If the FPIs continue their selling spree, then the rupee can weaken further, going forward.
Dollar recovers
A recovery in the US dollar in the past week is also adding pressure on the rupee. The dollar index has reversed higher from its low of around 89.20 last week. The index has surged over 1.5 per cent from this low and is currently trading at 90.7. Immediate resistance is in the 90.75-90.85 region.
A strong break above 90.85 will increase the likelihood of the index rallying towards 91.5 in the short term.
Such a rally in the index will bring more pressure to the rupee, and will also increase the possibility of it weakening towards 67.
Rupee outlook
Last week, we expected the support at 66.2 to hold. But the rupee has declined decisively below it and has also closed on a weak note on Monday.
As such, the level of 66.2 will now serve as a strong resistance and will cap the upside in the near term. A fall to 66.9 and 67 looks likely in the coming days.
If this 66.9-67 support zone halts the current fall, the rupee may get a temporary breather. In such a scenario, the currency can see a recovery towards 66.5 and 66.2 thereafter.
But if it declines below 67, it can fall further to 67.2. A further break below 67.2 will then increase the likelihood of the rupee revisiting 68 or even lower levels over the medium term.