Currency Call. Rupee in danger of a further fall

The rupee saw one of its worst weeks in the last four months this past week. It plummeted to close sharply below the 62 per dollar mark. The currency opened the week with a gap-down at 61.93 and recorded a high of 61.8375 on the same day. But it failed to gain ground as the sharp fall in the Indian benchmark indices dragged the currency lower.

The Sensex and the Nifty tumbled over 3 per cent last week. The rupee fell to a low of 62.50 on Friday before closing at 62.295, down 0.83 per cent for the week. Strong dollar demand from importers also added to the downward pressure .

Other data did not provide any comfort. The current account deficit (CAD) widened to $10.1 billion in the July-September quarter this year. This is much higher than the deficit of $7.8 billion in the previous quarter and $5.2 billion for the same quarter last year. Although the Reserve Bank of India (RBI) Governor had said that the level is comfortable, the recent trend is worrisome. The sharp widening — from $1.34 billion in the January-March quarter to $10.1 billion now — is a concern for the Indian rupee.

The Index of Industrial Production (IIP) fell 4.2 per cent (year-on-year) in October after growing 2.8 per cent in September. The manufacturing sector, accounting for over 75 per cent in the IIP, fell 7.6 per cent and dragged the overall IIP lower. The only consoling news last week was the Consumer Price Index (CPI) inflation numbers.

The CPI cooled off to 4.4 per cent in November from 5.52 per cent in October. Much-watched food inflation eased to 3.14 per cent in November from 5.6 per cent in October. Expectations of a rate cut were further fanned by these encouraging numbers.

Wholesale Price Index (WPI) inflation data is slated for release today. On the inflows front, foreign portfolio investors (FPIs) continue to be net buyers. Despite the market rout, the FPIs bought $613.92 million in debt and $684.76 million in equity in the past week.

The dollar index witnessed a corrective fall last week. It tumbled from a high of 89.55 to a low of 87.91 before closing at 89.32 last week.

Resistance for the index is at 88.8 and support is at 88. Inability to breach 88.8 would increase the chances of a break and fall below 88. Such a fall could take the index to the next targets of 87.5 and 87. Dollar movement will be influenced this week by the US Federal Reserve’s meeting on Wednesday.

All eyes are eagerly watching for any ‘hints’ on a prospective interest rate hike. On the charts, there are signals of the dollar nearing a top. The euro (1.2456) has reversed higher against the dollar from a crucial long-term support at 1.2240. A strong weekly close above 1.25 will be a bullish signal which can take the euro higher towards 1.2750 in the short-term. The other major components of the dollar index, the yen and the pound, are also nearing their crucial support levels. The dollar index itself has a strong resistance at 90.That said, there is a strong likelihood of the dollar reversing lower in the coming weeks. In such a scenario, the dollar index can even target 86 on the downside.

The Indian rupee recorded a decisive close below 62 last week, which could keep it under pressure. Immediate resistance is at 62.2. Inability to break this level will see the rupee weaken to 62.5. But surpassing this hurdle could lift the rupee to 62 this week.

In the short term, the strength in the rupee is expected to be limited to 61.85 if it breaks the psychological barrier of 62/dollar. This is a strong trend line resistance level.

As long as the rupee trades below 61.85, there is a lingering danger of the rupee breaking below 62.5 and declining to 63 in the short term.

The medium-term view is also bearish for the rupee, with strong resistance at 61. A decisive close above 62.5 will open the doors for a fall to 63.6 in the medium term.