Currency call: Rupee pauses at a key level

Global tremors shook the Indian financial market last week. The rupee tumbled from a high of 60.69 recorded on Tuesday to 61.73 by Friday.

However, dollar-selling by exporters helped the rupee recover some of its losses in the final trading session of the week. The currency closed at 61.14 on Friday, down 0.1 per cent for the week.

Speculation in the market points toward Reserve Bank of India (RBI) intervention to limit the fall in the currency last week.

Increasing global geo-political tension left the market highly risk-averse last week. US approval for limited air strikes on militants in Iraq was one of the major events.

If tension increases and crude oil prices go up, the rupee could fall further. Meanwhile, Russia decided to hit back against the sanctions imposed on it. It banned food imports from both the US and Europe.

The global uncertainty resulted in foreign money flowing out of India, dragging the rupee lower last week.

Foreign portfolio investors (FPIs) turned net sellers in the debt segment last week after buying consecutively in the previous six weeks, selling $821.76 million. However, they were net buyers in the equity segment, purchasing $260.79 million. The FPI flows will have to be closely monitored in the days ahead. The rupee could come under more pressure if the sell-off continues in the debt segment and spills over to equities as well.

The RBI left key policy rates unchanged, as widely expected. However, it reduced the statutory liquidity ratio (SLR) by 50 basis points to 22 per cent. The central bank continues to remain cautious on the inflation front.

A slew of important economic data releases are scheduled in this truncated trading week. Industrial production and the RBI’s most watched consumer price index (CPI) inflation data are to be released on Tuesday. After that, wholesale price index (WPI) inflation data is due on Thursday.

The dollar index (81.39) faces resistance near 81.6 and is not gaining sufficient momentum to breach this level. The inability to rise past 81.6 could pull the index down to 81.10 in the coming week. However, the broader view is positive for the index, with key support at 81. A rally to 82 and even 82.5 looks likely while the index remains above 81.

Among the major currencies, the euro (1.34) seems to be getting short-term support near 1.3350. A corrective rally to 1.3470 and 1.3510 looks likely if it can sustain above 1.34 in the coming week. A rise in the euro could help push the dollar index lower to the above-mentioned levels.

The reversal from 61.73 last week is technically significant for the rupee. A key trend-line support is present at 61.75. This could provide temporary relief to the currency.

The rupee could test its psychological resistance at 61 this week. If it manages to breach this level, it could strengthen further to 60.70 in the short term.

On the other hand, a reversal from 61 will leave the rupee under pressure. In this case, the rupee could be range-bound between 61 and 61.75 for some time with a bearish bias. Declines below 61.75 could drag it to 62 in the short term.

The medium-term view remains negative, with a bearish head-and-shoulder pattern on the chart. Key resistances for the rupee are at 60.5 and 60. A fall to 62.35 appears likely in the medium term.

The outlook for the rupee will turn bullish only of it breaks the psychological 60 level. But given the global uncertainty, such a break looks less probable at the moment.