CURRENCY CALL. In the short term, rupee could remain range-bound

The pressure on the rupee has eased. The currency fell to a low of 67.42 on Tuesday but recovered from there. It tested the psychological 67 level on Thursday before closing at 67.03, up 0.24 per cent for the week.

The US dollar weakening after the outcome of the US Fed meet on Wednesday also contributed to the rupee’s gain.

The Fed left rates unchanged and gave no hint on its next rate hike. Though the Fed did mention that risks to the economic outlook had diminished, it retained its stance of a gradual increase in rates.

The dollar index fell 1 per cent from to 96.5 around 97.5. The outlook for the dollar index is not very negative. But it can remain under pressure as long as it trades below 97. There is a strong likelihood of the index falling to 96 or even 95.5 as long as it trades below 97.

Such a fall can help limit the downside in the rupee in the coming days. Only a strong break and a decisive close above 97 will ease the downside pressure and open the doors for a fresh rise to 97.5-98 or higher.

Another factor which is holding the rupee from registering a fresh fall and has also kept the currency stable at around 67 levels over the last few weeks is the strong inflows from foreign portfolio investors (FPIs). They have been on a strong buying spree both in the debt as well as equity segments.

After selling about $1.57 billion in the previous two months, FPIs have bought $1 billion of Indian debt so far in July. The equity segment, on the other hand, has seen an inflow of $1.57 billion so far this month.

Though the rupee has recovered from the low of 67.42 in the past week, the overall picture is not very strong for the currency. It has a series of strong resistance points near 67, 66.9 and 66.8.

Therefore, the upside in the rupee could be capped at 66.8 even if it manages to break above 67 in the near term.

The currency will gain fresh momentum to strengthen to 66.5 only if it manages to surpass the hurdle at 66.8.

There is a possibility of the currency remaining range-bound between 66.8 and 67.5 in the coming days. A strong break-out on either side of this range will decide the next leg of move.

The medium-term view for the rupee continues to remain bearish with strong resistance in the 66.5-66 zone. The region between 67.5 and 67.7 is the important support to watch. A strong break below this support zone can immediately drag the rupee lower to 68.2 and 68.5.

This will also bring back the danger of the currency revisiting the previous lows and falling to fresh lows, going forward.