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Rupee likely to decline in short-term
June, 11th 2008

The shadow of crude oil continued to loom large over the forex markets. First, it was the hike in fuel prices in India that aided in propelling the rupee towards 43 again. Then it was the $11 spike in international crude prices last Friday, the largest single day gain ever, that ensured that the Indian currency stayed close to 43.

Plummeting stock prices and the FII outflows will result in additional pressure on the rupee in the near term. US dollar continued to vacillate according the statements made by various Central Bank Chairmen regarding the interest-rate movement in their region. It weakened last week following Mr Jean-Claude Trichets hint about raising rates and strengthened once Mr Bernanke made it clear that the Federal Reserve would strongly resist an erosion in long-term inflation expectation.

1-month view

The rupee reversed from the peak at 42.1 and is now hovering close to 43. We retain the view that the Indian currency would move within the range between 41.6 and 44 over the medium term. The medium term view for the currency is neutral but a shallow move in the above-mentioned range can be followed by a decline below 44.

A weekly close above 41.6 is needed to signal that the Indian currency has started appreciating again.

5-day view

The short-term trajectory for rupee is downwards. The move that commenced at the peak at 42.1 can take the currency lower to 43.2 or 43.56 in the near term. The key support to watch in the next few sessions lies in the zone between 43.5 and 43.66. There is a strong possibility of the decline halting in this band.

If the Indian currency halts its decline above 43.1, it will indicate that the rupee would appreciate to 41.9 or 41.2 in the near term.

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