Also, the dollar outflows from the struggling equity market can weigh on the rupee
BL Research Bureau
The rupee (INR), which has been weakening since the beginning of June, is facing renewed downward pressure as the dollar and crude oil prices soar. Ahead of the Reserve Bank of India’s (RBI) first open market purchase of government securities under the G-Sec Acquisition Programme (G-SAP 2.0) on Thursday, the yields on the 10-year bonds has reached its highest level since April 16, of about 6.18 per cent on Wednesday. This is because the papers considered for purchasing are illiquid as per market participants, meaning the purchase may not give the desired result of bringing the yields down.
Also, the crude oil price has been steadily rising and the price of Brent crude is above $75 in the international market. Although the price dropped by about 2.8 per cent on Tuesday, the rupee could not benefit as the dollar rallied – the dollar index is sustaining above 92-level. All these factors are negative for the rupee.
After being net sellers in April and May, the foreign portfolio investors (FPI) turned net buyers in June as the net investment in the month stood at positive ₹12,974 crore. While equities attracted a net inflow of ₹17,215 crore, the debt segment saw net selling of ₹4,829 crore. However, this month has not been good so far as the total net outflows stand at ₹1,291 crore out of which equities saw net outflow of ₹3,305 crore and debt, net inflow of ₹436 crore. As the equity remains the major contributor, the foreign inflows can be sensitive to how equity market performs. As the equity market has been struggling to build a sustainable rally, the FPIs can be more inclined towards pulling the money out, which can weigh on the domestic unit.
The rupee has been in a downtrend for the past one month, wherein it lost about 3.4 per cent in the past month as it declined from about 72.30 to the current level of 74.75. There is no sign of a trend reversal and although 74.75 is a support, with the momentum in favour of the bears, it is likely to be breached. If that occurs, INR can depreciate to 75 within a week. Below this level, it can drop to 75.30. On the other hand, if the rupee overturns the trend and begin strengthening, the nearest hurdle can be seen at 74.50, above that 74.25 is a string barrier.
As long as the crude oil price and the dollar continue to show strength, the rupee will be kept at bay and in fact, it can face downward pressure as and when the greenback and crude oil rallies. Technically too the trend is bearish and so, the rupee is likely to weaken towards 75 and 75.30 in the near term. On the upside, the gain, if any, can be limited to 74.25.