01 Oct 2015 16:40 IST

RBI’s surprise boosts rupee

The currency is likely to strengthen further in the short term

It’s celebration time in the Indian financial market as the Reserve Bank of India delivered a larger-than-expected 50-basis point (bps) rate cut in its latest monetary policy.

Raghuram Rajan is turning out to be a man who does it his way. Earlier, in January and March he surprised the market by cutting rates between policy meetings and this time when the market wanted a 25 bps cut, he has given it a bonanza of 50 bps.

The rupee, which was struggling to strengthen beyond 66, was lifted by the RBI’s surprise move.

The currency reversed sharply higher from its low of 66.42 on Tuesday to record a high of 65.58 on Wednesday, before closing at 65.59, up 0.61 per cent for the week.

The currency market had more reasons to rejoice from the credit policy besides the rate cut. Exchange-traded currency futures and options will be introduced in the three more pairs, Euro (EUR-USD), Pound (GBP-USD) and Yen (USD-JPY). Currently, futures and options are available in four currency pairs — USD-INR, EUR-INR, GBP-INR and JPY-INR.

The limit for hedging forex exposure without producing any underlying documents has been increased to $1 million from $250,000.

The foreign portfolio investors’ investment limit in government securities will be increased in phases to 5 per cent of the outstanding stock.

The week ahead

The US jobs data is due for release on Friday. A strong jobs data will strengthen the dollar, halting the current rise in the rupee. The Indian markets are closed on Friday for a public holiday.

Also, Chinese markets are closed for a week from October 1 to October 7 for the National Day. So, developments and data releases from the US will majorly influence global currency markets this week.

On the domestic front, the Nikkei Manufacturing Purchasing Managers’ Index (PMI) is scheduled for release on Thursday.

Rupee outlook

The short-term outlook for the rupee is bullish. The currency will come under fresh pressure only if it falls below 66 in the coming days.

Such a fall can take it lower to 66.3 and 66.5 once again. But as long as it trades above 66, there is no danger of a sharp fall in the near term.

Immediate resistance is at 65.50. A break above this level can take the rupee higher to 65.30 and 65.26 — the 50 per cent Fibonacci retracement and the 55-day moving average resistance level, respectively, in the coming week.

Further break above 65.25 will move the rupee higher to 65. It will also increase the possibility of the currency strengthening beyond 65 to 64.5 in the short term.

However, the strength in the rupee could be confined to the short term. The presence of a strong resistance in the 64.30-64 zone can cap the upside for the rupee.

The medium term outlook will remain bearish as long as the rupee trades below 64. It will also keep alive the danger of a fall to fresh lows over the medium term.

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