The US Federal Reserve deciding to keep rates unchanged last week cheered the Indian financial markets. The rupee, which was threatening to fall below 67, opened with a big upward gap on Friday at 66.14 and strengthened to record a high of 65.56 on Tuesday.
But the positive impact was short-lived.
Strong sell-off in European markets on Tuesday and weak manufacturing data from China the next day played spoilsport, dragging the rupee lower to 66.12. It finally closed at 65.99 on Wednesday, up 0.72 per cent for the week.
Global developments The coming week has a couple of key events that could influence the rupee movement. Second quarter US GDP number is due this Friday. A strong growth number could give the dollar an upper hand, piling pressure on the rupee. Next week, the much-awaited Reserve Bank of India’s policy decision is due, on Tuesday.
Market expectations are very high for a rate cut from the RBI. However, celebrations – if any – are likely to be short-lived as global events are likely to overshadow domestic developments.
Foreign Portfolio Investors (FPIs) have been selling Indian debt, but in smaller quantities, over the last four consecutive weeks. They sold $59.14 million in the past week and their total sales in the last four weeks stand at $340 million. However, FPIs have turned net buyers of Indian equities for the second consecutive week. They bought $331 million in the past week. The FPI action in the coming weeks will be crucial. If the sell-off in debt intensifies, then it could put the rupee under pressure.
Dollar index The outcome of the US Federal Reserve meeting last week dragged the dollar index (96.20) to a low of 94 on Friday. But the sharp reversal from this low reflects the reluctance among market participants to sell the greenback.
Immediate support is at 96. Strong support is in the 95-94 zone. Immediate resistance is at 96.60. A break above it can take the index higher to 97 and 97.30 in the coming week. Further break above 97.30 can take the index to 98 thereafter.
The price action on Wednesday on the candlestick chart reflects indecisiveness. Support for the rupee is at 66.25. A break below it can take the currency lower to 66.40 and 66.50 in the coming week. A further fall below 66.50 will see the rupee weakening to 67 in the short term.
Rupee outlook On the other hand, the outlook for the rupee will remain positive if it manages to sustain above 66.25.
In such a scenario, there is a strong likelihood of it moving higher to 65.55 levels once again. It will also keep the possibility alive of the rupee strengthening to 65 or even 64.5 in the short term.
However, the upside could be capped at 64.30-64; the medium-term resistance zone.
The medium-term outlook will remain bearish as long as the rupee trades below 64. It will also keep alive the danger of the currency falling to fresh lows over the medium term.