It was a volatile week for the rupee last week. The currency seems to be losing the strength it gained in the initial part of the week. After opening the week at 65.07, the rupee strengthened to 64.89 by Monday. But the currency lost steam thereafter and reversed to below 65 to record a low of 65.18 on Wednesday. The currency closed at 65.04 on Wednesday, down 0.12 per cent for the week.

Data on domestic macro indicators released in the past week were mixed. The Index of Industrial Production (IIP) surged 6.4 per cent (year-on-year) in August from 4.1 per cent in July. The strong growth is raising hopes of an economic recovery. The Wholesale Price Index-based inflation continues to remain in negative territory for the eleventh straight month. The WPI for September came in at minus 4.54 per cent, slightly higher than minus 4.95 per cent in August.

Inflation based on the Consumer Price Index also rose in September to 4.41 per cent from 3.66 per cent in the previous month. Both the inflation numbers reversed higher on the back of high food prices. In the coming week, India’s trade balance will be a key data to watch.

Increased Foreign Portfolio Investor (FPI) limit in debt securities, which came into effect on Monday, has had a positive effect. Data from National Securities Depositary (NSDL) show that the Indian debt segment witnessed an inflow of about $896 million on Monday and $640 million on Tuesday. The net inflow in this segment in the past week was $1.6 billion.

Although the surge in inflows into the debt segment has not had any immediate impact on the rupee, this is going to be a positive for the currency in the long term.

However, the FPI action in the equity segment remained muted. The equities segment saw inflows of $165 million in the past week.

Rupee outlook

The rupee has closed on a mixed note. The currency seems to be range-bound, between an important near-term resistance at 64.7 and support at 65.42. A breakout on either side of these levels will provide a clear cue on the next direction for the rupee.

Intraday chart suggests that the rupee is not gaining enough to strengthen beyond 65. While it trades below 65, a fall to 65.2 is possible in the coming sessions. Further break below 65.2 can drag the rupee to 65.4 in the coming days. Inability to reverse higher and a break below 65.4 will increase the pressure on the rupee to extend its fall to 66 once again in the short term.

The currency will gain strength in the near term only if it breaks above. Such a break can take it higher to 64.9 initially. A rise past 64.9 can take it further to 64.7. If the rupee manages to breach the 64.7 hurdle, it can extend its current upmove to 64.3 and 64 in the short term.

However, the presence of strong medium-term resistance in the 64-63.8 zone could cap the upside of the rupee. A break above this resistance zone looks unlikely. A reversal from here will increase the risk of the currency revisiting 66 or even lower levels over the medium term.

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