Currency Call. Rupee to remain under pressure

The Indian rupee recorded its first positive weekly close last week after four consecutive weeks of negative closes. The currency opened the week on a strong note at 61.42 and strengthened to 60.91 on Thursday. But it failed to sustain above 61 and reversed lower to close at 61.33 on Friday, up 0.45 per cent for the week.

The recovery by global currencies against the dollar and the US Federal Reserve’s minutes of its September meeting showing that the US might not be in a hurry to raise interest rates helped the rupee gain ground last week. This was also supported by strong foreign inflows in the debt segment. Foreign portfolio investors (FPIs) bought $902 million in debt. However, they were net sellers of equity for the third consecutive week. They sold $102.8 million in the equity segment in the past week. This is something significant to be watched. If the outflow in the equity segment intensifies, the rupee could fall further.

The Indian debt market has some reason to celebrate an early Diwali this year. The total inflows into the debt segment in 2014 crossed the $20-billion-mark last week. A record $20.6 billion has been pumped into the Indian debt segment so far this year. The previous record of $10 billion was seen in 2010.

Though the record inflows have helped the Indian rupee outperform most other emerging market currencies against the dollar on a year-to-date basis, the foreign inflows have not helped the currency over the last few months.

Since May, the FPIs have bought Indian debt worth $12.9 billion. Over the same period, crude oil prices have tanked about 18 per cent. But unfortunately, both these factors have failed to add strength to the Indian rupee. The currency recorded a high of 58.33 on May 23 and has tumbled 4.9 per cent since then.

The Index of Industrial Production (IIP) for August dropped to 0.4 per cent, a five-month low. Adding to the worry is the revision of the July IIP data, which was revised lower to 0.41 per cent from 0.5 per cent released earlier. Since this data was released after the market close on Friday, the Indian rupee could open the week on a weak note today.

The market would be keenly awaiting the Consumer Price Index (CPI) inflation data which is due for release today. It will be followed by the Wholesale Price Index (WPI) data release on Tuesday.

The dollar index (85.91) snapped its rally that has been on for twelve consecutive weeks.

However, technically the uptrend remains intact as the 21-day moving average is providing support and the index has bounced back after recording a low of 84.94 on Thursday. A rise to 86.5 looks likely in the coming week.

Though the Japanese yen (107.6) could strengthen against the dollar in the short-term, the outlook for the euro (1.2624) and the pound (1.6065) the other major components in the dollar index, are looking weak.

The euro is vulnerable to a fall to 1.22, while the pound could fall to 1.57 or even lower in the coming weeks.

This could help push the dollar index higher to 88.5. Having said this, the global strength in the dollar could limit the strength in the Indian rupee.

The inability to breach the psychological resistance at 61 and a reversal from 60.91 is a sign of weakness for the rupee. A fall to 61.5, the immediate support level, looks likely this week. A fall below 61.5 could drag the currency further down to 62.

The downside pressure would ease only if the rupee breaks above 61. In such a scenario, the rupee could strengthen to 60.8 in the short term.

However, the level of 60.8 is a strong hurdle for the rupee, which might not be broken easily. So the upside in rupee for now could be capped at 60.8.

In the medium-term, 62.1 is a key support for the rupee. A reversal from here could see the rupee strengthen to 61 again.

But price action on the charts suggests that there is a strong likelihood of the rupee breaching 62.1. Having said this, there is a danger of the rupee declining to 63 in the medium-term.