Increased optimism in the market ahead of the budget helped the Indian rupee strengthen beyond 60 per dollar last week. The currency opened on a weak note and fell to 60.26 on Monday.

However, it gained momentum and strengthened to 59.54 on Thursday before closing at 59.73 on Friday, up 0.59 per cent for the week. The budget fever over-shadowed news that the fiscal deficit was 45.6 per cent of the full-year target in just the first two months (April-May) of 2014-15. The market would be keenly watching for measures to crub the deficit.

The manufacturing purchasing managers index (PMI) inched up to 51.5 in June from 51.4 in May. On the other hand, the services PMI surged to 54.4 in June from 50.2 in May. Trade balance and industrial production data releases are due this week.

Budget focus

Neverthless, the main focus of the market would be on the budget. Foreign institutional investors were net buyers of $265.78 million in debt and $611.42 in equity in the past week.

The dollar index (80.27) surged sharply higher after recording a low of 79.74 last week.

The improving employment situation in the US helped the index rise back above 80 levels. Immediate resistance is at 80.33. A break above this level could take the index higher to 80.5 and 80.75 in the short-term.

Dollar-rupee outlook

The rupee has series of strong short-term hurdles at 59.5, 59.45 and 59.37. Unless these levels are breached, further strength in the currency is not likely.

But the RBI’s interventions are suppressing the rally in the currency.

Since it is hard to predict what the Union Budget can hold for the financial markets, here are two scenarios for the rupee.

Bullish Scenario: If the new government satisfies the market expectations in its maiden budget, the rupee could continue to stay strong above 60. In this case, the currency could break its immediate resistance at 59.5 and strengthen to 59.37 and even 59.

Bearish Scenario: But if the budget shatters all the optimism, the rupee could decline below the psychological level of 60. The ensuing targets of such a fall will be 60.5 and 61.

The medium-term view remains bearish for the rupee, with strong resistance at 58.85. Key support for the currency is at 60.50. A fall below this level could drag the rupee lower to 61.8 in the medium-term.

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