The rupee ended at 87.21 versus the dollar on Tuesday, depreciating nearly 0.6 per cent. Factors like US President Trump saying that the US will go ahead with tariffs on Canada and Mexico after having agreed for a 30-day pause, dollar demand due to expiry of derivative contracts in the domestic market impacted the domestic currency negatively.
Also, reports suggest dollar demand from importers for hedging too weighed on the rupee.
In addition, the slide in the domestic equity market has resulted in capital flight, leading to a sell-off in the rupee. According to the National Securities Depository Limited data, the net FPI (Foreign Portfolio Investors) outflows over the past week stood at about $1.1 billion. For February so far, the net outflows in the equity segment is $3.8 billion.
Even though the dollar remained flat in the past few sessions, the rupee declined due to the above factors.
There are reports that the Reserve Bank of India stepped in on Tuesday to curb the decline in the rupee, providing some relief. However, the rupee continues to exhibit bearish inclination and the charts, too, substantiate the same.
Chart
The rupee, which has been consolidating in the sideways band of 86.60-87, breached the support at 87 and closed at 87.21 on Tuesday. This has opened the door for further weakness.
The only saving grace should be the decline in the dollar index. The chances of further fall looks high. In case the dollar index, which is currently trading at 106.30, drops towards the nearest support at 105.50, the rupee might recover to 86.80, essentially moving back into the 86.60-87 range.
However, if the dollar index recovers from the current level of 106.30, it can head back to 108 in the near-term. In this scenario, the Indian currency might retest 87.60 or even 87.80, potential support levels.
Outlook
Given the likelihood for some more softening in the dollar in the coming days, the rupee might recover to 87 or 86.80. However, note that the broader trend remains bearish and that the upside can be capped anytime.