CURRENCY CALL. Rupee to amble sideways

The Indian currency market took a breather last week after the election-induced rally the week before. The Indian rupee remained strong above 59, but traded in a narrow range between 58.33 and 58.86.

The currency strengthened from its low of 58.86 on Wednesday to an 11-month high of 58.33 on Friday before closing at 58.50, up 0.47 per cent for the week. The rupee has closed higher for four consecutive weeks now.

Foreign institutional investors (FIIs) continue to pump money into the Indian market. FII flows into the debt segment seem to be gaining momentum gradually. FIIs bought $933 million in debt in the past week, compared to their purchase of $620 million and $404 million in the previous two weeks, respectively. In the equity segment, they bought $817 million last week. The RBI appears to have the interests of exporters at heart, intervening to limit the currency’s strength.

According to reports, the RBI bought dollars through state-owned banks last week.

The big event to watch this week is the Narendra Modi swearing-in on Monday.

Following this, the market will be closely watching the selection of Cabinet ministers.

Apart from this, the fiscal deficit and gross domestic product data releases on Friday are other key events to be watched. A weak euro pushed the dollar index (80.35) higher for the third consecutive week. Immediate resistance for the index is at 80.5. A strong break above this level could take the index to 81 and 81.25 in the coming week. On the other hand, inability to breach 80.5 could keep the index range-bound between 80 and 80.5 in the short-term.

The immediate outlook for the rupee is not very clear.

Last week’s candle stick chart reflects indecisiveness in the market.

The rupee could continue to oscillate between 58.3 and 58.85 this week as well. A breach of 58.3 could take it to 58.2 initially and then to 58. But with the presence of the RBI in the market, short-term strength in the rupee could be limited to 58. On the other hand, a decline below 58.85 could see the rupee weaken to 59 and 59.2

The medium-term stance is unchanged. The 100-week moving average, the 61.8 per cent Fibonacci retracement level and trend-line are poised near 58, making this level a key resistance.

Technically, it might be very easy for the rupee to breach 58 immediately.

But the strength in the currency could be limited to 57.5 even if the 58 level is breached. The probability is high for a reversal from the 58-57.5 zone and a decline to 60-61 once again.