CURRENCY CALL. Rupee gathers momentum

Six long weeks of a narrow sideways consolidation between 67.7 and 68.35 in the Indian rupee came to an end last week.

The rupee strengthened, decisively breaking the range above 67.7. It opened with a gap-up and continued to strengthen against the dollar all through the week. It made a high of 67.15 on Monday before closing at 67.22, up 1.1 per cent for the week. Weak dollar, coupled with a strong rally in domestic equity indices, helped the rupee gain ground.

Dollar outlook The US dollar index has been falling continuously for more than a month since the last week of December 2016. The index is currently finding support around 99.30. It made a low of 99.23 on Friday and has bounced back from there to trade at 99.65 now. The 38.2 per cent Fibonacci retracement support is at 99.23. If the index manages to sustain above this support, a range-bound move between 99.23 and 101 is possible for some time. But, a strong break below 99.23 may increase the downside pressure and drag the dollar index lower to 98 and 97.7.

Crucial resistance for the dollar index is in the 101.5 and 101.7 zone. The downside pressure will ease only if the index breaches above 101.7 decisively. But such a strong rally looks less probable at the moment.

Data watch The coming week is packed with a series of important data releases. It starts with the Reserve Bank of India’s monetary policy meeting on Wednesday. This becomes a key event to watch out for, especially after the Budget, as expectations are high for a 25-basis point rate cut.

The outcome of the RBI meeting may play a significant role in deciding on whether or not the rupee could strengthen further against the dollar. This will be followed by the Index of Industrial Production (IIP) and the Consumer Price Index (CPI) inflation numbers on Friday and Monday, respectively.

Rupee outlook The strong rally in the past week breaking the prolonged narrow consolidation is a positive for the rupee. However, there is a crucial support near current levels at 67.10.

Whether or not the rupee breaks above this support will decide the next move for it. Inability to break above 67.1 and a strong reversal from there may have the potential to take the rupee lower to 68 and even 68.35 in the short term.

On the other hand, if the rupee decisively manages to surpass the hurdle at 67.10, it can move higher to 66.90 initially. Further break above 66.90 may see the rupee strengthening to 66.30 or even 66 thereafter.