Weekly view: Rupee can stay underneath stress

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The dollar (USD) has been going down since early April and continued to decline last week. This caused major Asian currencies to appreciate against the greenback. However, the rupee (INR) lost ground against the dollar and remained one of the worst performing Asian currencies for the past week. The loss since the beginning of the year is now around 3 percent. India with a record number of new coronavirus cases, liquidity measures by the Reserve Bank of India (RBI), a tightening of inflation and negative foreign flows contributed to the decline.

FPI is withdrawing

Total net investment by foreign portfolio investors (FPI) this year is now 50,815 crore, 2,589 crore less than a week ago. That said, the FPIs sold last week. The majority of those sell-offs took place in the equity segment, as net outflows last week were £ 5,693 billion and net inflows for the year are now £ 48,701 billion. However, the debt segment managed to attract funds as it posted a net inflow of £ 3,727 billion over the period. As a result, the net debt outflow for the year improved from 16,849 crore to 13,122 crore. Even so, all FPI activity over the past week looks bearish, which weighed on the Indian currency. With the market struggling to sustain rallies, expect more FPI sales, which may put further pressure on the rupee.

Crude oil stocks rise

On renewed demand concerns as the pandemic worsens, crude oil prices have started to feel the heat. On top of that, the US crude oil inventory data released by the Energy Information Administration (EIA) at its last meeting shows that inventories are up 0.6 million barrels, versus the expected 3.7 million barrels decline. The price reacted negatively and there could be a further decline in the future. Since there is an inverse correlation between the rupee and crude oil, a fall in the price is a positive factor for the rupee.

INR-USD chart

Towards the end of last week, the local currency rose significantly. However, it failed to win past 74.50 and abruptly reversed direction. This was followed by a sharp drop in prices, with the exchange rate reaching 75.50. As this level provides support, it may give the rupee bulls hope for a rebound. In fact, INR opened with a gap in today’s session and is now trading at 75.15. The daily chart shows that 74.50 and 75.50 are the key levels and a break in these two levels can give us an indication of the next phase of the trend.

outlook

While the rupee has strong support at 75.50 as the graph shows, there are unfavorable factors such as a spike in inflation, rising new coronavirus cases, etc. Although the rupee is appreciating in value it can be capped and 75.50 is a key level look. Violating this base could cause the rupee to weaken towards 76 over the next week.