Rupee vs US Dollar outlook: Fundamentals, technical charts signal more fall in INR in near-medium term

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After a non-event kind of July futures expiry, the USDINR pair was seen catching a roller coaster ride. The weaker dollar, probable 5G spectrum inflows, and RBI’s selling side intervention resulted in a breakout of crucial support of 79.70 and 79.50 in Indian Rupee. The bearish momentum was seen extending up to 78.50 in a matter of just 3 days, without much changes in fundamentals. The story doesn’t finish over here. The pair rebounded sharply by 1.30/- from the bottom in the next couple of days to recover its losses fully. The credit of the same goes to importer’s rush to cover their payables at a discounted Dollar-Rupee rate and a sudden escalation of US-China tension over Taiwan. Rightly standing at the 79.50 mark, what could be the outlook on the pair? Will it again move towards 78.50 or will it give a break above the 80 mark? Let’s take the help of fundamentals, tactical and technical, and draw a conclusion on the outlook.

Fundamental side: On the domestic side, a recently released preliminary trade figure suggests further widening of the deficit to a record level of $31 billion. That means a daily requirement of $1.40 billion (considering 22 working days). Inflation on the other side is out of the RBI’s band of 4% (+/- 2%) for consecutive 6 months in a row, and pressurized RBI to go for a sudden rate hike by 40, 50 and 50 bps in just a matter of 3 months. However, considering the global slowdown, the RBI has pointed out that they could slow down their normalization process.

Against this, if the Fed remains aggressive on the path of hiking rates like in the 1980s and goes for a QT as per the commitment, then it would trigger another round of bloodbath in equities and thus demand for USD will rise. Further, interest rate differential will go in favour of USD, and further outflow could be seen from EM and India too. On the geopolitical front, apart from the never-ending Russia-Ukraine war, the market has got another theme- the US-China clash over Taiwan. One cannot ignore the fact that Taiwan Strait has serviced 88% of the largest container ships in 2022. Supply chain issues were just starting to improve, but these issues could resume supply chain disruption anytime. In the energy pack, crude oil prices are trading at a multi-month low; however, Saudi is busy hiking rates for the US and Asian buyers at a record high from September, sending no relief message for net oil importers like India. Summing up in short, fundamentals seem vulnerable for the Rupee over the short and medium term.

Tactical side: Apart from fundamentals, one needs to also consider the tactical part. This originally includes RBI’s intervention, however, the recent ‘U-turn’ in FPIs flows could also be considered the same. Through all means of intervention like forward, futures, and spot market; RBI has tame down the depreciating move. From Apr to July 2022 they have used almost $76.7 billion to keep Rupee in the middle of the EM performance list. On the FPI flow side, after 9 straight months of outflow, July registered a minor inflow of Rs. 1974 crores and in August we can observe an inflow of almost Rs 16,000 crores. It would be interesting to watch how FPIs carry their investment ideas over the next couple of months when the Fed is expected to raise their rates by 75 bps.

Technical tone: As can be observed over a daily chart of the USDINR pair, it has been trading on a bullish note with higher highs and lows. Over the short to medium term, the pair could find support near the 78.35-78.50 zone and the final strong support lies at 78.00 levels. Whereas, resistance is located at 80.05, which if crossed we can see a move towards 81.00 -81.50 levels.

Outlook: The recent appreciating move towards 78.50 was not supported by any drastic changes in fundamentals. Thus, the currency again depreciated up to 79.80 levels in a matter of just 2 working days. From here on, what will matter the most would be USD demand domestically and globally. If US inflation remains glued near an all-time high then US DXY could move towards 107.50 to 109 levels over the medium term as the probability of a higher rate hike in 2022 will be increased. Further, a fall in oil prices may not translate into positiveness in Rupee as it is still above RBI’s tolerance levels. Though RBI has used their reserves to calm down the nerves and FIIs have started investing their funds in August, but still overall fundamental, tactical, and technical suggest further depreciation in Rupee towards 80.50 levels over the near term and 81-81.50 over the medium term. On the contrary side, the 78.50 to 78.00 zone will act as a crucial zone to watch.

-Amit Pabari is the Managing Director of CR Forex Advisors. The views expressed in this article is his personal views.