In line with the global sell-off amid the geopolitical ructions and investors scurrying for ‘safe havens’, India's rupee fall accelerated last week. After opening the week at 60.90, the rupee dropped to a 5-month low of 61.74 on Friday, 8th August.
Strong data from the US in the previous week indicating that the Federal Reserve will tighten monetary policy sooner than expected, coupled with escalation of tensions in the Middle East and Ukraine after U.S. President Barack Obama approved air strikes in Iraq took a heavy toll on the rupee and other Asian currencies. Reports this past week showed U.S. service industries grew at the fastest pace since 2005 and the trade deficit narrowed unexpectedly in June.
After witnessing a drop of 1.38 percent, the rupee recovered sharply later on Friday as some of the currency's recent losses were seen as overdone even as sentiment stayed weak given the global geo-political concerns. Most emerging Asian currencies eased on Friday as strong Chinese trade data helped in recovering some ground.
The Reserve Bank of India (RBI) was also spotted selling dollars for a second consecutive session on Friday. India's foreign exchange reserves fell to $319.99 billion as of Aug. 1, compared with $320.56 billion the week earlier. Over the week, the rupee traded in the range of 60.70-61.74 levels and depreciated 0.39% (vis-à-vis week’s opening level) and remained largely unchanged compared to its previous week’s closing of 61.18 levels. The rupee ended the week at 61.14 levels, its second consecutive weekly drop, compared to its opening level of 60.90. In the forward segment 1mth, 3mth, 6mth and 12 mth annualized forward premia closed at 7.96%, 8.41%, 8.39% and 8.14% compared to its opening at 7.62%, 8.24%, 8.20% and 8.04% respectively.
INDIAN STOCK MARKETS
Benchmark share indices ended lower for the second straight week tracking a sell-off in global equities amid rising tensions between Ukraine and Russia and after US President Barack Obama authorized air strikes in Iraq. On the domestic front, rising Crude Oil prices raised fears of further widening of fiscal and current account deficits The 30-share BSE Sensex 30 ended down 152 points or 0.6% at 25,329 and the 50-share Nifty ended down 34 points or 0.5% at 7,569. In the broader market, the BSE Mid Cap index ended down 152 points or 1.7% at 8,962 while the BSE Small-cap index ended down 63 points or 0.6% at 9,828. During the week market witnessed FII inflows to the tune of $260.78 million in equities and outflows of $821.76 million in debt, making it total net outflows of $560.98 million.
OUTLOOK
Fundamental
Domestic financial markets will continue to track the developments in global arena closely. News that Russia had ended its military exercises near the Ukrainian border and the rebels were asking for a ceasefire augurs well for Europe. While this is not the end of the trouble in Ukraine, but for the time being it has diffused the tension in the region.
Moreover, the situation in Gaza is more or less discounted by the market. If the situation in Iraq also improves then that will bring quite a relief for the markets and it may once again come back to “risk-on” mode which will be beneficial for both Indian capital and currency market. However, as mentioned in our earlier reports that geo-political risks have a way of taking market by surprise and hence the probability of volatility induced by such risks remains intact.
On the domestic data front, India inflation due on the 12th will be carefully watched and any rise in the inflation above the target level of 8 percent could prompt action from the reserve bank which in turn could affect the USDINR pair. The IIP for the month of June will also come on Tuesday. Risk on account of rainfall is gradually subsiding as heavy rains and availability of water in check dams have resulted in the sudden spurt in sowing. Sowing activity that had taken place only in 19% of the cultivable area of the state till last month, suddenly picked up after the recent rains. At the end of the first week of August, it had touched the 75% mark. Dollar/Rupee is likely to stay in a range of 60-62 with risk on and risk off environment swaying the rupee in both directions.
Technical
The dollar/rupee pair once again broke its crucial resistance level of 61.40, quite effortlessly, and came close to its next target level of 61.80. Though the pair has retraced from there yet the technical indicators are not giving any clear signal as of now. Market participants remain undecided about the direction of the pair.
8-13-21days EMAs are still showcasing good optimism in the trend as the positive crossover of lower EMAs above 21-days EMA is still intact, while a corrective fall toward lower levels can be seen. The possibility of a corrective fall towards 60.70/60.80 remains open. However the same possibility of the correction will be negated upon a daily closing above 61.65 as we may witness accelerated fall in rupee thereafter.
On the daily technical setup, MACD (12/26/9) is moving upward while signal line is hovering above the line of equilibrium, exhibiting continued strength in the momentum for short term. In the immediate couple of sessions there is a likelihood of pair retesting the levels of 61.40, especially on back of dollar demand due to holiday shortened week. Pressure on athe rupee is likley to continue and any significant appreciation of the rupee will not be easy to come by.
Week’s Range: 60.70 – 61.80. Week’s Trend: USDINR pair likely to witness two-way movement.