The rupee (INR), which has been under fresh selling pressure since the beginning of this month, hit a new low of 84.42 against the dollar (USD) last week. But since then, it has been stuck in a narrow range. The domestic currency has closed at 84.42 on Tuesday.
Key factors that dragged the rupee lower have been the rally in the dollar and the capital outflows from the domestic market.
The dollar index (DXY) has been surging since early October reflecting on the geopolitical uncertainties and an uptick in inflation. Donald Trump’s victory in the Presidential Election has also fuelled the rally. After appreciating 3.2 per cent last month, DXY is up 2.4 per cent so far this month. This surge has been weighing on INR.
Apart from this, the Foreign Portfolio Investors (FPIs) seem to be cashing out. According to the NSDL (National Securities Depository Limited) data, the net FPI outflows over the past week stood at about $893 million. So far in November, the net outflows have been nearly $3.4 billion.
Falling in line with the above, the chart also shows a clear bear trend in the rupee.
Chart
While the Indian currency faced considerable downside pressure recently, the price action shows that the bears seem to have shed some momentum. This has not reversed the trend, but INR has stayed sideways over the past few sessions.
If the bears regain traction, the rupee can depreciate to 84.60 and then possibly to 84.75. On the other hand, if INR recovers, it will face resistance at 84.35 and 84.25. To turn the short-term trend bullish, the local currency should rise past 84.25.
The dollar index is currently testing a crucial resistance at 107. If DXY manages to breach this, a fresh rally can be established, which can lift it to 110 in the near-term. The upside can even extend to 114 over a few weeks.
But if there is a fall off the barrier at 107, it can decline to 104. Only a breach of this support can turn the trend bearish for DXY.
Outlook
Rupee’s fate largely hinges on how the dollar index reacts to the barrier at 107. If this is breached, the rupee can hit 84.60 soon. Whereas a decline in DXY off 107 can help INR recover, possibly towards 84.25.