Rise in dollar puts the rupee under test

The rupee has depreciated against the dollar over the past few sessions. On Tuesday, it closed at 83.54. The decline in the local currency was due mainly to the sharp rally in the dollar, triggered by an increase in inflation and a deterioration in consumer sentiment.

The US Consumer Price Index (CPI) increased to 3.48 in March, compared to 3.17 per cent in February. On the other hand, the Consumer Sentiment Index dropped to 77.9 in April, as against 79.4 in the previous month, data released last Friday showed. The above factors led the market to believe that the rate cuts could be pushed beyond June. The rupee did not receive support from foreign inflows as well. According to NSDL (National Securities Depository Ltd) data, net FPI (foreign portfolio investors) flows stood at $226 million between April 9 and 16.

The above being said, the chart shows that the Indian currency is holding on to a support at the moment. Below is an analysis.

CHART

Despite the decline over the past few sessions, the rupee maintains the range of 83.25-83.60, within which it has been oscillating for the past three weeks. If the current downward pressure leads to rupee dropping below 83.60, we could see a quick fall to 84 in the near-term.

On the other hand, if rupee recovers on the back of support and manages to get past the hurdle at 83.25, it can extend the rally to 83 and then possibly to 82.80.

The dollar index (DXY) witnessed a sharp rally last week, which took it above resistance levels at 105.30 and 104.50. The index is currently hovering around 106.20 and it faces a barrier at 107. If DXY moderates on the back of this level, it can find support at 105.30 and 104.50. A fall below the latter can change the short-term bias negative.

On the other hand, if DXY rallies past 107, it can result in another leg of a quick rally to 110, a resistance. Such a rally in the greenback can drag the rupee towards 84. Whereas a drop in DXY on the back of resistance at 107 can aid a recovery in rupee.

OUTLOOK

As the rupee remains within the 83.25-83.60 range, the next leg of trend remains uncertain. The direction of the break of this price band will be the clue. That said, given the current strength in the dollar, the rupee will exhibit a bearish inclination.