FPI outflows, elevated crude prices and steadying dollar poses risk
The deadlock between bulls and bears in the dollar-rupee currency pair might soon come to an end as the risks from various factors could weigh on the Indian currency. On Tuesday, the rupee (INR) closed at 77.71 i.e., near the bottom of the range of 77.50-77.80 against the dollar (USD). Foreign Portfolio Investor (FPI) outflows, elevated crude oil prices and a steadying dollar are the major risks that INR currently faces. These are not likely to fade soon.
FPIs have pulled out a little over a billion dollars in June so far (net outflow stands at $1.1 billion) according to the latest data by NSDL (National Securities Depository Ltd). Brent crude continues to hover around the $120 a barrel mark and its inverse relationship with the rupee is a concern. Nevertheless, the RBI (Reserve Bank of India) seems to have so far prevented a sharp depreciation in the local currency with its huge pile of foreign exchange reserves. Going forward, the rupee could depreciate against the greenback gradually, if not sharply.
The range of 77.50-77.80 holds good as INR closed at 77.71 on Tuesday. So, ideally, the break of this price band could offer clues on the direction of the next leg of trend. Until then, the USDINR is technically neutral. But the recent price action hints at a possible breach of the support at 77.80. In such a case, INR could drop to 78 swiftly and it might even extend the downside to 78.30. On the other hand, if there is recovery that takes it above 77.50, it can appreciate to 77.25 and possibly to 77.
The dollar index (DXY), which has been under water since mid-May, seems to be back on its feet as it has bounced well over the past few sessions. It has rebounded from the support at 101.4 and is currently trading around 102.75. It is back above the key level of 102.50 and the chart hints at the resumption of the uptrend in the dollar. This can act as a drag on the rupee.
As the dollar looks to be gaining traction, the rupee might not have a good time ahead. Especially considering that FPI outflows remain steady and crude prices remain at higher levels. So, although the range of 77.50-77.80 is valid, there is a good chance that the local unit will breach 77.80 and that makes 78 a reasonable near-term target.
That said, keep a watch on the RBI decisions with respect to rates today, which has the potential to set the tone for the next price swing.