Rupee likely to be under pressure

It was another volatile week for the rupee. Though the currency opened on a weak note and fell initially, it regained strength thereafter. The rupee fell to a low of 65.66 on Tuesday last and reversed sharply higher after the outcome of the Reserve Bank of India’s monetary policy on Wednesday. The RBI left the repo rate unchanged at 6 per cent as was widely anticipated by the market.

However, the impact of the RBI’s decision on the rupee was short-lived and it reversed lower again after making a high of 64.95. The currency closed at 65.36 on Monday, down 0.12 per cent for the week.

Key macro-economic data are scheduled for release this week. The Index of Industrial Production (IIP) and the Consumer Price Index (CPI) inflation, both are due for release on Thursday. Among them, the CPI will be most watched. The CPI in August had moved up to 3.36 per cent from 2.36 per cent in the previous month. Market will be keen to see which way the inflation moves. India’s trade balance data is also scheduled for release this week.

The dollar index extended its upmove for the fourth consecutive week. The index made a high of 94 and has come-off slightly from there on the back of mixed reaction to jobs data released on Friday. Data showed that the non-farm pay-roll declined by 33,000 while the average hourly wages increased by 2.9 per cent (year-on-year) in September.

Experts believe that the increase in wages could be because of the hurricane that hit the US. But the trend shows that the wages in the US is picking up. The employee wages have been moving higher over the last three consecutive months. This strengthens the case for the next rate hike in December.

The dollar index, currently trading at 93.70, has an immediate support at 93.60. If it manages to reverse higher from there, a rise to 94.3 is possible. Further break above 94.3, will pave way for the next target of 95. Such a rally in the dollar index may cap the upside in the rupee in the coming days.

On the other hand, if the dollar index breaks below 93.6, it can fall to 93 or 92.85. The region between 93 and 92.85 is strong support for the index which is likely to limit the downside in the near-term.

Inability to breach decisively above the psychological level of 65 in the past week is a negative. A strong break below the immediate support at 65.5 can bring the rupee under pressure again. Such a break will increase the likelihood of the currency declining to 65.70 initially. Further break below 65.70 will see the rupee weakening to 66 or even 66.30 thereafter.

On the other hand, if the rupee manages to reverse higher from 65.5, it can strengthen to 65 again. A range-bound move between 65 and 65.5 is possible for some time. The currency will need to break above 65 decisively to gain momentum. Such a break can take the rupee higher to 64.80 or 64.75. The next resistance is at 64.60 which is likely to cap the rupee’s strength in the short-term.