Crimea spoils rupee party

Weak economic data from China and uncertainty over Ukraine are playing spoilsport with the pre-election rally in Indian financial markets. The rupee, which was on the verge of strengthening above 60, reversed lower from the high of 60.6 on Tuesday to end the week at 61.19. Since the currency market is closed today on account of “Holi”, the rupee could open with a gap on Tuesday following the outcome of Sunday’s referendum on the status of Crimea.

On the domestic front, economic data releases were mixed. The trade deficit for February narrowed to $8.1 billion from $14.1 billion in the previous year. However, a slowdown in exports − which fell 3.7 per cent in February − is a concern. Though the index of industrial production rose to 0.1 per cent in January after three consecutive months of contraction, the manufacturing sector contracted for the fourth consecutive month.

The only data release that offered some relief to the market last week were the inflation numbers. Consumer price inflation (CPI) fell to 8.1 per cent in February from 8.8 per cent in January, while wholesale price inflation (WPI) dropped to 4.68 per cent from 5.05 per cent.

Foreign institutional investors (FIIs) remained net buyers for the week.

They bought $620.8 million in debt and $329.8 million in equity in the past week. The outcome of the US Federal Reserve meeting on Wednesday will be a key event next week.

The dollar index remains weak and has failed to breach the 80 level. It could now test 79, a crucial support. A fall below 79 will be bearish and could drag the index lower to 78.60 and 78.

On the other hand, if the support at 79 holds, then the index can reverse higher again to 80 in the coming days.

The Bloomberg-JP Morgan Asian Dollar Index (ADXY) has been trading sideways between 114.8 and 116 over the past few weeks. The index is currently falling within this range and could extend its slide to 114.8, the lower end of the range, in the coming days. This signals that the rupee could remain weak in the short term.

The inability to sustain above 60 has left the short-term outlook weak for the rupee. The 200-day moving average of 61.8 is a crucial support for the currency. While the rupee remains below 61, it could weaken to test this support in the coming week. A fall below 61.8 could take it further lower to 62. On the other hand, a reversal from 61.8 could lead to the rupee strengthening to 61 and 60.75 in the short term.

The sharp reversal from 60.6 last week leaves the broader medium-term sideways range intact. If the rupee holds above 62, the medium-term outlook could turn positive and there will be a strong likelihood of the currency strengthening to 60 and 59.