Currency call: Rupee could weaken to 60

Indian financial markets seem to be losing momentum. The rupee remained weak all through the week. It reversed lower after recording a high of 58.41 on Monday. But the currency remained stable and range-bound between 58.79 and 59.21 for the rest of the week. The rupee closed at 59.10 on Friday, down 1 per cent for the week, its first lower weekly close after four consecutive weeks of strong closes.

Though month-end dollar demand from oil companies kept the rupee weak around 59 levels, strong inflows from foreign institutional investors (FIIs) limited the fall. FIIs bought $1.3 billion in debt last week, while selling equities worth $36 million.

Macro-economic data releases last week were positive. The current account deficit fell sharply to 0.2 per cent of GDP in the fourth quarter of 2013-14, from 3.6 per cent the year earlier. In addition, the fiscal deficit for FY13-14 was at 4.5 per cent of GDP, less than the estimated 4.6 per cent.

However, Indian economic growth at sub-5 per cent levels for the second consecutive year remains a worry. The GDP grew at 4.7 per cent in FY13-14, lower than the estimated 4.9 per cent growth, but up from 4.5 per cent expansion in the previous year.

The RBI’s monetary policy review on Tuesday will be a key event for this week. Manufacturing and service production managers’ indices are also scheduled for release this week.

The dollar index (80.39) failed to breach resistance at 80.5 and closed on a mixed note. The outcome of the European Central Bank’s meeting on Thursday will be a key event that would decide whether the index is going to breach the resistance at 80.5 and travel to 81-81.25 or fall to 80, breaking its support at 80.25.

The short-term outlook is weak. On the daily candle stick chart, there is a bearish double-bottom pattern. Key resistance is at 58.8.

While the rupee remains below this level, it could weaken to 59.5. But a breach of 58.8 would take the rupee higher to 58.3 and 58.2. But technically, this looks less likely. The reversal from 58.3 has happened from a key resistance. So the weakness in rupee extending beyond 59.5 toward 60 cannot be ruled out in the short-term.

In the medium-term, a cluster of resistances is present in the 58.3-58.0 zone. So the strength in rupee could be limited to 58 or maybe 57.5. A reversal from here could see the rupee weaken to 61-62 again in the medium-term.