The Indian Rupee tumbled to 95.65 against the US Dollar on Thursday, marking a significant decline from recent levels. However, Navneet Damani from MOFSL expects the rupee to appreciate towards 92-93 levels in the coming weeks, driven by a 10-12% correction in crude oil prices over the last week. The currency's weakness has been a concern for months, but recent developments may provide much-needed relief to the currency market. MCX Crude Oil contract expiring on June 18 surged 0.7% to near ₹8,787 in India's morning session, following a 3.6% surge on Wednesday after recovering from significant losses.
A 10-12% correction in crude oil prices over the last week has emerged as the biggest factor supporting the rupee's potential recovery. Damani noted that the decline in oil prices comes at a crucial time, providing support to the rupee after months of depreciation driven by elevated energy costs. Average WTI crude prices were around $64-65 per barrel last year, while the average for the first five months of this year remained above $90 per barrel, creating substantial pressure on India's external balances. With crude oil prices coming closer to $80, it looks like much of the pain that we have had over the last few months will now be taken care of, according to Damani. However, he cautioned that geopolitical developments and the successful implementation of the recently announced agreement would need to be monitored closely before drawing firm conclusions.
Recent tax reforms related to NRI and FCNR borrowings are expected to attract between $50 billion and $70 billion in reserves and capital inflows over the next couple of months. Banks have begun introducing new structured products aimed at attracting overseas funds, with Damani estimating that these initiatives could potentially bring in $50-70 billion worth of reserves or inflows into the economy. The new structured product which many of these banks are launching is expected to bring in about $60-80 billion worth of flows, which could change the narrative of rupee flows from outwards to inwards. Such inflows, if realised, could significantly improve liquidity conditions and provide additional support to the rupee.
Initial resistance for the rupee is seen at the bearish trend-line break area near 96.03, where a clear daily close above would open the way for a more sustained recovery towards the all-time high at 97.08. Immediate support sits at the 20-day EMA at 95.49, with the next structural floor at the rising trend-line region around 94.77. A break below this latter level would weaken the current constructive tone and expose deeper retracements. The USD/INR pair trades near 95.65 with the near-term trend appearing sideways in an overall bullish structure amid a Symmetrical Triangle formation. With crude oil prices hovering around $75-85, which will be pretty much okay to help an appreciation bias in the rupee, the outlook appears more constructive than recent months.
The major trigger for the Indian Rupee will be the Consumer Price Index (CPI) data for May, scheduled for publication on Friday. India's CPI data is expected to arrive higher at 4% Year-on-Year from 3.48% in April. In the policy meeting last week, the Reserve Bank of India (RBI) kept the Repo Rate unchanged at 5.25% as expected, and warned that the central bank would need to act "if inflation gets generalized." The RBI actively intervenes in forex markets to maintain a stable exchange rate and help facilitate trade, with higher interest rates usually strengthening the rupee through the carry trade mechanism.
