CURRENCY CALL. Rupee hovers around a key short-term resistance

The rupee strengthened further against the dollar breaking above 65 as expected. The currency made a high of 64.78 on Friday. But it lost some ground on Monday and reversed lower giving back some of the gains made in the past week. It finally closed at 65.03 on Monday.

Although the dollar index recovered in the past week, strong inflows from Foreign Portfolio Investors (FPIs) overshadowed the greenback’s strength and lent support to the rupee on the upper hand. The dollar index recovered sharply from its low of 98.86 to break above the psychological 100 mark in the past. The index is currently at 100.50. This bounce-back in the dollar failed to have any negative impact on the rupee and the FPIs continued to pour money into the Indian market. The Indian debt segment witnessed an inflow of $1.41 billion, while the equity segment attracted $1.84 billion in the past week.

The best quarter The first quarter (January-March) of 2017 that went by has been one of the best for the Indian markets in many ways. First, the 4.74 per cent rise in rupee against the dollar this quarter has been its best since September 2012. Second, after selling Indian debt aggressively between October 2016 and January 2017, FPIs had turned net buyers since February. An inflow of $4.47 billion into Indian debt in the first quarter is the best in the last two years since March 2015. Also, the $6-billion inflow into equity this quarter is the highest since June 2014. Will this momentum continue for the rest of the year? We will have to wait and see.

Events to watch Two major events are key to the rupee’s journey this week. First is the Reserve Bank of India’s monetary policy meeting on Thursday (April 6). The RBI is expected to leave policy rates unchanged this week. Any surprise from the RBI may cause high volatility in the markets. The second event is the US non-farm payroll and the unemployment data on Friday. A strong jobs number might give a boost to the dollar, which in turn may restrict the strength in the rupee.

Rupee outlook The sharp downward reversal on Monday is significant as it has happened from a key trend-line resistance around 64.70. The rupee should breach this hurdle at 64.70 to strengthen further against the dollar. If the rupee remains below 64.70, a fall to 65.20 is likely in the near term. Further break below 65.20 may drag the rupee to 65.50. Inability to break above 65.50 may keep the rupee range-bound between 64.70 and 65.50 in the short term. On the other hand, if Monday’s weakness in the rupee remains short-lived and it manages to break above 64.7, it can regain its momentum. In such a scenario, the rupee can strengthen towards 64. But the strength in the rupee is expected to be restricted to 64 as this level is a key medium-term resistance. There is lesser possibility of the rupee strengthening beyond 64 for now.