Weekly Rupee View: Rupee caught between softer crude and stronger dollar

The rupee weakened marginally over the past week, losing about 18 paise, or 0.2 per cent, to close at 94.74 against the dollar on Tuesday. Despite the decline, the local currency continues to hold well above the record low of 96.96 touched in May.

A notable positive development has been the easing of concerns in the energy market. The US decision to grant a 60-day waiver on sanctions related to Iranian oil exports, coupled with progress in peace talks between the US and Iran in Switzerland, has improved sentiment. As a result, Brent crude futures, trading around $77 per barrel at the time of writing, have fallen sharply. After declining over 17 per cent in May, the benchmark is down another 15 per cent so far in June. Lower crude oil prices are positive for India, as they reduce pressure on the trade balance, inflation and the rupee.

Foreign flows have also improved. According to NSDL data, net FPI inflows stood at about $2.2 billion over the past week. Consequently, net outflows for June so far have narrowed to about $1.7 billion, indicating that selling pressure from overseas investors is easing.

However, the rupee has not been able to capitalise fully on these favourable developments because the dollar has strengthened. The greenback has found support from firm US economic data and expectations that the Federal Reserve could keep interest rates elevated for longer.

Markets are also watching developments on the trade front. The top US trade negotiator is scheduled to visit India this week as both countries work towards an interim trade agreement. A successful agreement could be a big positive for the rupee.

 The rupee, which has been recovering over the past month, is now facing key resistance at 94.20. After testing this level, the local currency has moderated and is currently trading around 94.74. On the downside, 95 is likely to act as an important support.

The near-term direction of the rupee will largely depend on the dollar. The dollar index has gained considerable strength recently, registering a strong breakout last week and extending the rally this week.

Notably, last week’s close above 100.50 signals that the medium-term trend for the dollar index has turned positive. If the momentum sustains, the index can advance towards 102. In such a scenario, the rupee could weaken towards 95.75.

However, there is also a possibility of a corrective decline in the dollar index following the recent breakout. If the index retraces to retest 100, the rupee can appreciate towards 94. Resistance above 94 is at 93.50.

Therefore, the rupee’s next move is likely to be dictated by the dollar index. A continuation of the dollar rally could weigh further on the local currency, whereas a correction in the greenback may provide room for the rupee to strengthen.

The near-term outlook remains mixed. While softer crude oil prices and improving foreign flows are supportive, a stronger dollar continues to act as a headwind. As a result, the rupee may remain range-bound with a slight negative bias, with 94 and 95.75 emerging as the key levels to watch.