Rupee may fall up to 75.20 against US dollar; FIIs sell-off, COVID, slow vaccination may impact INR

Till the time rupee doesn’t break the 73.50 to 73.70 zone, the view remains bullish

By Amit Pabari

While flipping a coin in the sky, your expectation built up strongly in favour of either ‘Head’ or ‘Tail’. And if the outcome goes in your favour then definitely for the next time you build up more expectation while tossing a coin. Like this whenever you analyse higher vaccination news, easing of the lockdown, reopening of the economy or higher stimulus packages then your expectation build-up for good data and you take a call on it. And when data comes in line or above the expectation, you cheer up. Then your expectation keeps on rising for the next economic data. Right now, based on recently released record level US economic data supports a strong bullish view on the US dollar index.

Based on the above fact, expectations were rising that Rupee will depreciate but probably RBI along with slight fall in USD helped Rupee to regain its losses for a while. The “Sell (Rupee) in May and go away” will necessarily hold true in upcoming time and this would be another year in the below list.

To evaluate better, let us understand the factors which can have an impact on the rupee going ahead.

Summer Sell Seasonality for Rupee: Historically, we have seen that May remains a depreciating month for the rupee in over the last decade; where the Rupee has depreciated 9 out of 10 times in the month of May. Hence seasonality effect can play its role to trigger more depreciation.

Historically, we have seen that May remains a depreciating month for the rupee in over last decade

Looming worry creates nervousness in FII: Over the past few weeks, FIIs stopped pushing their flows or in fact withdrew money from equity markets mainly due to higher US bond yields and likely impact of strength in the US dollar. Foreign portfolio investors (FPIs) sold shares worth Rs 14,520 crore for month of April and May(till date). Adding further fuel, the negative real yields have made buying bonds unattractive pushing away investors from bond market too.

That apart, India’s slower-than-expected pace of COVID vaccination and record daily increases of infections have raised concerns over India’s economic recovery and that would lead to flight of capital back to the US.

India could fall again into “Twin deficit”: Preliminary data showed India’s merchandise imports in April rose to $45.45 billion, nearly 7.7% YoY. On other hand, exports dipped by 12.3% from $34.45 billion in March. This resulted in a trade deficit of $15.24 billion on the back of higher import of gold, petroleum products and electronic goods. Further, the government fiscal plan for FY22 likely to fall short as the budget was made with an expectation of the situation at that time; means COVID-19 second wave was not considered. Hence, India could experience a twin deficit issue again in FY22. A widening both deficit remains a matter of concern as it could lead to devaluation of the rupee.

Fed is tightening their belt: Janet Yellen’s comment for hiking the rate was supportive for the yield and dollar index, but she turned down the prospects of hikes immediately. Probably she was checking the impact of hawkish tone. However, a record jump in economic growth and other economic data will put pressure on the Fed to come up with tapering and rate hike actions. This could in turn leave fed to repeat the 2013-2015 “Taper & Hike story” where they had to follow the market’s expectation of rate hike. The flows could go back to the safe haven treasuries and US dollar index. This could be negative for the Emerging market and currencies in the upcoming time. Throughout the week, market participants will be focused on PMIs, non-farm payrolls and unemployment data to check for the sustainability of the upward rally in the dollar.

Technical Outlook:

Technically, the near-term support for the USDINR pair is at 73.770 levels, but on a broader perspective, the crucial support remains at 73.50 levels which if broken shall indicate a trend reversal. Till the time the pair doesn’t break the 73.50 to 73.70 zone, view remains bullish and the chances of retesting 74.80-75.20 increase.

Technically, the near term support for the USDINR pair is at 73.770 levels

Conclusion

All in all, considering the above-mentioned fundamentals and technical, it looks more like that the biasness for the rupee is towards depreciation and the pair can move towards 74.80-75.20 levels in the upcoming sessions. Hence, any dip shall be short-lived and merely a buying opportunity.

(Amit Pabari is managing director at CR Forex Advisors. The views expressed are the author’s own.)