The rupee recovered over the past week, appreciating about 0.87 per cent or 84 paise to close at 95.6862 against the dollar on Tuesday. The rebound comes after the domestic currency had witnessed sharp weakness earlier this month amid geopolitical tensions and elevated crude oil prices.
A key factor supporting the rupee has been the easing in global risk sentiment. Markets turned relatively calmer on hopes of a possible US-Iran peace agreement, reducing concerns over a prolonged disruption in West Asia. Reflecting this, crude oil prices corrected sharply. Brent crude futures slipped below the $100-mark and were trading around $96 per barrel, down nearly 8 per cent so far this week. For an oil-importing country like India, lower crude prices help reduce pressure on the trade balance and support the rupee.
That said, foreign flows continue to remain weak. According to NSDL data, net FPI (Foreign Portfolio Investors) outflows stood at about $862 million over the past week, indicating that overseas investors are still cautious.
Domestically, there was some support to sentiment after Finance Minister Nirmala Sitharaman indicated that the government is willing to consider investor concerns regarding LTCG and STCG taxation. Any favourable changes on this front could improve market sentiment and potentially aid the rupee going ahead.
Overall, while easing geopolitical tensions have offered relief, sustained recovery in the rupee will depend on the stability in crude oil prices and improvement in foreign flows.
Chart
Rupee hit an all-time low of 96.96 on May 20 before seeing sharp recovery in the subsequent sessions. While this corrective rally has taken some pressure off the local currency, the broader downtrend has not changed.
Currently at 95.69, the rupee has notable resistance levels at 95.20 and 95. A breakout of the latter can lead to the upswing extending to 94.20 and 94. However, if the Indian currency falls off the resistance at 95-95.20, it can moderate to 96.25.
Nevertheless, at this juncture, the probability for the rupee to consolidate is high. Sideways trend is also supported by the flat movement in the dollar.
Since May 18, the dollar index has been moving in a sideways trend between 98.90 and 99.50. The direction of the breach of this price band will lend us cues about the path of the next trend.
If the dollar index breaks out of 99.50, the outlook can turn bullish, lifting it to 100.50, weighing on the rupee. However, if the dollar index slips below the support at 98.90, it can fall to 98 and support a rupee recovery.
Outlook
Overall, the rupee appears to be entering a consolidation phase after the recent recovery. In the near term, the local currency is likely to trade within the 95–96.25 range, supported by softer crude oil prices and a stable dollar index.