Rupee favoring Bulls or Bears

Indian rupee completed its biggest monthly fall since August 2013 on concerns of higher global oil prices spurring inflation and widening the trade deficit. The currency lost 0.5 percent this quarter on concerns of a potential drop in farm output because of inadequate rainfall; Furthermore, the bigger worry was that it would stoke price pressures. The monsoon, which accounts for more than 70% of India’s annual rains, was 43% lower than the 50-year average this month, according to the weather department. Brent crude rallied about 3% in June on speculation that violence in Iraq would disrupt supplies.

 

The Reserve Bank of India frequently bought dollars ever since the rupee touched ~ 58.33 to US dollar on May 23rd, a 11 month high; this was essentially to prevent the currency from appreciating too much. Moreover, it prevented the currency from gaining much despite positive factors such as hopes for reforms sparked by the election of Narendra Modi as PM last month, which spurred a surge in foreign investment.

The rupee is expected to remain range-bound until the Modi government delivers its first budget on July 10, which would be an acid test of its fiscal and reform credentials. The unit fell 1.78 percent in June, marking its biggest monthly fall since August 2013, and it fell 0.41 percent for the quarter. Besides RBI intervention, concerns over global factors such as the violence in Iraq, hit the rupee in June. However, the rupee is up 2.72 percent so far this year, making it among the top performers among the Asian currencies.

 

Technical View:

 

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USDINR Chart forms a falling wedge pattern, thus, indicating a bullish reversal. We saw strength in rupee before the election results during March 2014 and it continued with its winning streak after announcement of the new government in May. For the last week of July, rupee traded range bound, moving close to the key resistance point of 60.85. RSI is indicating the pair to be in the oversold zone and could cause a market reversal from here on. After breakout above this level, rupee may weaken to a level of 62.75 levels. Fall below the 58.22 level would negate our bullish view on USDINR.

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