CURRENCY CALL. Rupee poised to fall further

The rupee is turning weak, as expected, after testing the important resistance at 66. The currency touched a high of 66.07 on Tuesday and has reversed sharply lower from there. It fell to a low of 66.71 before closing at 66.66 on Wednesday.

The major trigger for this turnaround came from the RBI’s monetary policy on Tuesday. The RBI cut the repo rate by 25 basis points to 6.5 per cent.

The stock market witnessed a strong sell-off falling 2 per cent on Tuesday. As a result, the rupee which was hovering around 66 — a key medium-term resistance level — also turned weak.

The RBI’s monetary policy has a lot in store for the Indian currency market. From May 2, the rupee reference rate against the other major currencies (euro, pound, yen and dollar) will be calculated based on actual market transactions on volume-weighted basis.

At present, the reference rate is calculated from the quotes polled from a select list of banks. Non-resident Indians (NRIs) will now be allowed to participate in Exchange Traded Currency Derivatives (ETCDs), the guidelines for which will be issued by end-June. The restrictions on using plain vanilla currency options have also been eased. Following the RBI meeting, the Consumer Price Index (CPI) inflation and the Index on Industrial Production (IIP) are due for release in the coming truncated week. A fall in the CPI numbers could fuel the expectation of further rate cut from the RBI. The currency market is closed on Friday on account of a public holiday.

The dollar index is consolidating between 94.3 and 95. A breakout on either side will decide the next move. A break above 95 will ease the downside pressure and take the dollar index higher to 95.5. Such a rise will increase the pressure on the rupee and push it further lower. On the other hand, a fall below 94.3 can drag it to 94 and 93.8.

The key medium-term resistance at 66 has halted the upmove in the rupee that has been in place since February. The bearish reversal last week from 66.07 is signalling the beginning of a fresh leg of downmove in the rupee. Immediate resistance is at 66.5. As long as the currency trades below this level, a fall to 67 is possible in the coming week.

The region between 67 and 67.15, which encloses both the 100-day and the 21-week moving averages, are strong short-term resistance levels for the rupee. The 38.2 per cent Fibonacci retracement support is also placed in this region. So, an immediate break below 67.15 looks less probable. There is a possibility of a near-term correction to 66.8 or 66.5 from this resistance zone.

However, the strong fall from the resistance at 66 keeps the medium-term bearish outlook intact. So, an eventual break below 67.15 will see the rupee weakening to 68 or even lower thereafter.