What lies ahead for Rupee? Lok Sabha election, RBI, Indian markets to decide

Indian rupee has turned its fate as it touched below 69-mark against US dollar benchmark index on Tuesday. At around 1506 hours, rupee was trading at Rs 68.860 up by Rs 0.163 points or 0.24% against dollar. Interestingly, the rupee has appreciated to 68.845-level in previous hours of trading session. On Tuesday, rupee finished at 69.023. Current performance was due to rally in domestic market indices and PM Narendra Modi's speech over Indian satellite mission. In fact, rupee surpassed the shocks of increased demand for the US currency from importers and rising crude prices.

Earlier CLSA pointed that, rupee has gained 7% from its all-time lows made in Oct’18, as CAD stabilised and foreign capital inflows improved due to global factors and expectations of a stable Government. In the same period, the foreign investors have bought Indian equities worth $6 billion.

Analyst from Kotak Securities, Anindya Banerjee states that trading in Indian rupee will be tricky ahead. 

According to Banerjee, USDINR has a tendency to form long drawn out rounded bottoms. Such formations, as they occur, can often stop traders looking to play trend or momentum. For example, between June 2017 to March 2018, USDINR oscillated wildly between 63.50 and 65.00 levels on spot. During that phase, aggressive intervention from the central bank prevented USDINR from breaking below 63.00 handle. One way to trade such formations are to demarcate clear zones of demand and supply. 

Once done, then either one can play long and short closer to the flanks of that range or one can pick just a long or short side bet and wait for the prices to travel up to that range extreme to take bets. Currently, 69.40/60 on spot, remains the resistance zone and closer to 68.80, followed by 68.30/50 are the major support areas, as per Banerjee. 

Where is rupee headed? 

In Kotak's view, rupee, at this point, is one of the few currencies which are holding promise to stand in front of this Dollar resilience. On Tuesday's trading session, Banerjee notes that, the demand for Rupee liquidity was significant.
"We expect Rupee liquidity to turn into surplus during first half of FY 20, therefore RBI may shy away from fresh swaps or even large scale OMOs. Having said that, direction of the forward would depend on how aggressive RBI remains on future path of rates. Markets have pencilled in a 50 bps cut during the next two quarters. However, if RBI hints at 75-100 bps reduction by moving its stance from neutral to accommodative, then it can have a salutary impact on forwards," he said.

"Trading will become tricky in INR. We would change our approach from selling USDINR on momentum to fade a spike towards 69.20/40 region on spot and then cover those shorts below 69.00, between 68.75/85 region. The range could get narrow," he added.