The rupee, in line with our expectation, depreciated last week to slip below the prior low against the dollar (USD). The domestic unit registered a fresh low of 75.96 on Tuesday before closing the day at 75.87. Thus, it has declined by 0.14 per cent on Tuesday and the year-to-date (YTD) loss of INR against USD currently stands at 3.8 per cent. As it stands, the local currency is still in the dark and the probability of it testing the previous low of 76.91 is high.
Inflation hardens
On the fundamental front, INR does seem to face challenges as inflation hardened in November. While CPI (Consumer Inflation Index) is lower year-on-year (y-o-y), it firmed up sequentially. The WPI (Wholesale Price Index) was higher on y-o-y and sequentially too. CPI stood at 4.91 per cent last month compared to 4.48 per cent in October and WPI came in at 14.23 per cent in November as against 12.54 per cent in the preceding month.
However, the foreign fund flows were positive over the last week. According to NSDL (National Securities Depository Limited) data, the net Foreign Portfolio Investors’ (FPI) outflow for the month of December stands at ₹12,414 crore compared to the net outflow of ₹14,245 crore a week ago. This means that the FPIs have pumped in money into the domestic market over the past week.
The rupee extended the decline and is trading close to an important level of 76. Considering the prevailing price action, the bear trend is strong and so, INR is set to drop further. Going ahead, it can fall below 76 and the nearest support can be seen at 76.26. A decline below this level can take the local currency to 76.60 – the subsequent support. In case if there is a recovery from here, it can be restricted by the resistances at 75.80 and 75.40. Notably, the short-term will remain bearish until the rupee trades below 75.40.
Dollar index looks bullish
The dollar index is looking bullish. However, trading over the past week shows that the index has entered a sideways consolidation. That is, it has been oscillating between 95.75 and 96.60; unless either of these levels are breached, the next leg of trend in the near-term cannot be predicated with reasonable accuracy.
Outlook
In the coming week, the rupee can be expected to drop below 76. It will most probably extend the decline and is likely to touch 76.26 before the end of this year. If at all the domestic currency appreciates, it might not rally above 75.40.
Therefore, those who are looking for short-term trading opportunities can short INR at current levels and sell more if it rallies to 75.40. Place stop-loss at 75.15 and look to exit at 76.26.
When INR slips below 76 decisively, revise the stop-loss to 75.40.