CURRENCY CALL. Rupee down against the dollar for fifth consecutive year

The rupee has weakened for the fifth consecutive year against the dollar. In 2015, the currency fell 4.7 per cent against the dollar — from 63.04 in 2014 to 66.15 on Thursday, the final trading day of the year.

However, 2015 was a relatively better year for the rupee compared to its other emerging market peers.

Currencies such as the Russian rouble, Malaysian ringgit, South African rand, Brazilian real and Argentine peso fell 17-35 per cent in 2015.

The manufacturing purchasing managers’ index (PMI) is one key indicator which will need watching as we step into 2016. The manufacturing PMI is down from 54.5 in December 2014 to 50.3 as of November 2015.

The trend suggests that there is a danger of the manufacturing sector entering into the contraction phase.

The next PMI data release is due on Monday.

Crude oil prices falling to a multi-year low has eased India’s import bill by about 15 per cent to an average of $32.56 billion in 2015 from $38.53 billion the year before.

But it failed to give the rupee a boost as exports continued to fall in the last 12 months. The average export bill is down over 17 per cent to $22.15 billion in 2015 from $26.82 billion in 2014.

The Consumer Price Index (CPI) inflation easing from over 5 per cent to 3.69 per cent by July paved the way for a series of rate cuts by the Reserve Bank of India in 2015.

The RBI has slashed rates by 125 basis points to 6.75 per cent from 8 per cent.

But there is some uncertainty over further rate cuts as the CPI has clawed back above 5 per cent once again and currently stands at 5.41 per cent for the month of November.

After witnessing a record foreign money inflow in 2014, action by Foreign Portfolio Investors (FPIs) in 2015 was muted.

India’s debt segment witnessed an inflow of just $7.4 billion, down from a record inflow of $26 billion in 2014. The inflows into Indian equities were much lower.

The FPIs bought $3.19 billion, down from $16 billion last year. The FPIs turned net sellers in both debt and equity over the last two months.

If the selling intensifies then the rupee could come under pressure.

If there was one event that kept the entire world on its toes, including the RBI, it was the first interest rate hike by the US Fed in almost a decade.

But the 25-basis-point rate hike in December turned out to a non-event.

However, the RBI prepped the pitch for this event by building its forex reserves. India’s forex reserves surged to $355 billion by August 2015 from $319 billion in December 2014.

However, the reserves have fallen thereafter and stand at $351 billion as on December 18.

According to a report from the Bank of America Merrill Lynch, the RBI has the room to sell $20 billion from its reserves and still maintain an eighty-month import cover.

The strong reversal from the December low of 67.13 has turned the short-term outlook bullish for the rupee.

An important and immediate resistance is poised at 66. A strong break above this hurdle can take the rupee higher to 65 and 64.75 in the coming weeks.

But the presence of the 55- and 100-day moving average around 66 may make it difficult for the rupee to strengthen beyond 66. Inability to break above 66 will see the rupee weakening to 66.50 in the near term. Further fall below 66.5 can drag it to 67 in the short term.

In the medium term, a cluster of resistances are placed between 65 and 64.

On the charts, the upside for the currency seems to be capped at 64 over the medium term and the overall downtrend is expected to remain intact.

The key support level to watch is 67. A strong break and a decisive weekly close below 67 will see the rupee tumbling to 68.5 and 69 or even lower levels this year.

The medium-term outlook will turn positive for the rupee only on a strong break above 64, which would then pave the way for a fresh rally to 61.