The rupee has been volatile in the past week, moving around 65 against the US dollar. The currency strengthened on Wednesday, breaking above 65 to touch a high of 64.87. But it failed to sustain at that level and fell to a low of 65.19 on Friday, shedding all the gains made during the week.
A bounce in the US dollar index on Thursday triggered this reversal in the rupee. However, a strong equity market helped the rupee to recover again from its low and close at 64.04 on Monday.
Foreign portfolio investors (FPIs) continued to sell Indian debt for the fourth consecutive week. They sold $469 million in the debt segment last week and $1.48 billion over the last four weeks.
Though FPIs had bought $213 million in the equity segment last week, cumulatively they remain net sellers over the last four weeks. The FPIs sold $1.16 billion in Indian equities over the last four weeks.
This indicates that the support for the rupee from a strong equity market on the back of a sharp rally on Monday could be temporary. The rupee will remain under pressure if FPIs continue to sell
The support at 89.5-89.4 has limited the downside in the dollar index for the second consecutive week. Though the index has come off slightly from its high of 90.35, the overall outlook remains positive as long as it sustains above 89.4.
A strong break above the key resistance at 90.55 will bring fresh bullish momentum to the index. Such a break can take the dollar index higher to 91.2 initially.
Further break above 91.1 will increase the likelihood of the index targeting 91.8, and 92, going forward. Such a rally in the dollar index will see the rupee falling below 65.5 and targeting 66 in the coming days.
The dollar index will come under pressure only if it breaks below 89.4. The next targets are 89 and 88.5.
Inability of the rupee to move higher even after opening with a wide gap-up above 65 is a negative. This, coupled with the overall price action in the past week, reflects the inherent weakness and also the absence of fresh buyers to take the rupee sharply higher above 65. This leaves intact the broader bearish outlook for the rupee.
A key resistance is at 64.80 which has to be breached for the downside pressure to ease. Only such a break will strengthen the currency again and take it higher to 64.5 and 64.3 in the short term.
Having said that, the rupee will remain vulnerable to a break below its support at 65.2 as long as it remains below 64.8. Such a break will see the rupee weakening towards 65.5 and 65.6 initially. Further break below 65.6 will then increase the likelihood of the currency revisiting 66 levels, going forward.