Outcome of US Fed meet may raise rupee’s volatility

The rupee has finally broken out of the narrow range of 63.30-63.65, which had restrained it for more than two weeks.

Two key events in the past week made the market nervous — the Special Investigation Team (SIT) recommending tighter regulation on P-Notes to curb black money; and the AP Shah committee’s adverse comments on Minimum Alternate Tax (MAT) on Foreign Portfolio Investors (FPIs).

Forex markets turned nervous as a result and the rupee declined below 64 to record a low of 64.21 on Monday.

However, the currency reversed higher thereafter to record a high of 63.82 before closing at 63.91 on Wednesday, down 0.51 per cent from the past week.

More volatility is guaranteed when the market opens on Thursday, as the outcome of the US Federal Reserve meeting would be revealed by then. Any change in the US Fed’s language or hint on when the rate hike would kick off could put the rupee under pressure.

The focus of the forex market will then next turn towards the Reserve Bank of India’s monetary policy, scheduled for August 4.

The dollar index is facing resistance at 98 and has come off from the high of 98.15 recorded on July 20. It is currently poised at 96.65. Immediate resistance is at 97.15. As long as the index trades below this hurdle, a fall to 96 and 95.85 is possible. If the index manages to reverse higher from the support at 95.85, a rise to 97 and 97.30 becomes possible. But a break below 95.85 will see the decline extending towards 95.35.

The strong reversal from Monday’s low of 64.21 is a positive for the rupee in the short term. This move keeps the broader 63.30-64.30 sideways range intact for the currency. The rupee could strengthen to 63.60 and 63.50 in the coming sessions.

If the currency manages to surpass the hurdle at 63.50, it can move higher to test the range support at 63.30 in the short term. But a reversal from 63.50 will see it weakening back to 63.75 and 64 in the coming week.

The currency has been stuck between 63.30 and 64.40 for almost three months now.

A breakout on either side of this range will decide the next leg of move for the rupee.

We will have to wait and see whether the outcome of the central bank meetings (Fed and RBI) can trigger a breakout.