The Indian rupee extended its rally against the US dollar for the second consecutive week but turned volatile ahead of the Reserve Bank of India’s monetary policy meeting this week. Though the currency was threatening to fall below 68 in the initial part of the week, the pressure was short-lived.
It made a low of 67.99 but reversed sharply higher from there and continued to trade strong for the rest of the week. The currency surged to a high of 66.85 on Monday, but failed to sustain those levels and closed at 67.11, up 0.5 per cent for the week.
Volatility is guaranteed in the coming week as the much-awaited RBI’s monetary policy decision is due on Wednesday.
The wide expectation in the market is that the RBI would keep the rates unchanged and wait to see the progress of the monsoon for further action in August.
However, there are expectations in the market that the RBI might increase rates by 25 basis points this week. As such, the outcome of the RBI meeting will be key in setting the direction of move for the rupee.
FPI sell-off eases
Foreign portfolio investors (FPIs) remained net sellers of Indian debt for the seventh consecutive week. However, their pace of selling came down last week, which may give some breather for the rupee.
FPIs sold $93.6 million in the debt segment last week. However, for the month of May, FPIs offloaded $2.9-billion worth Indian debt, the highest monthly outflow in this segment since November 2016.
If the FPIs resume their selling spree in the coming weeks, it could halt the current upmove in the rupee and bring back the pressure on the currency.
Dollar reverses
The strong rally in the dollar index, which was in place since mid-April, halted last week.
The index tested 95 levels and has reversed sharply lower in the past week. It is currently trading at 93.80. A key support is present near current levels at 93.60.
If the index manages to sustain above this support, a range-bound move between 93.6 and 95 is possible for some time. But a break below 93.6 will increase the likelihood of the index falling further towards 92.8. Such a fall in the dollar index may help the rupee retain its strength.
Rupee outlook
The sudden and sharp pull-back move on Monday from the high of 66.85 is significant. The subsequent strong close below 67 indicates lack of fresh buyers to take the rupee decisively above 67.
The price action in the coming days will need a close watch to decide whether it signals the end of the current upmove in the rupee. If the currency remains below 67, it will confirm that the corrective rally has ended.
The level of 67.25 is a key support. A break below it can take the rupee lower to 67.6 in the short term. It will also keep the possibility high of the rupee falling again below 68 in the coming weeks.
Key resistances for the currency are at 67 and 66.85. The rupee will gain strength only if it breaks above 66.85. Such a break can take the currency higher to 66.45 thereafter.