Indian Rupee Drops to Three-Month Low on Rising Political and Economic Challenges and Strong Dollar

The Indian rupee has weakened to a three-month low amid usual month-end dollar bids by importers which were underpinned by signals from the US that the greenback supply will be tighter going forward.

Among other things, the rupee will be influenced by the emerging political and economic challenges for the new Indian government.

Its first major reform faces a test in the upper house of parliament where the ruling Bharatiya Janata Party does not have a majority.

A key bill to raise the FDI cap in the insurance sector to 49% is set to come up in parliament next week. The main opposition Congress has not yet extended its clear support to the bill.

Inflation is expected to quicken in the coming months with the extent and distribution of monsoon rainfall this year likely to be well below the long-period average.

In another setback, the fiscal deficit in Asia's third largest economy has crossed the half-point mark of the full year target in the first quarter itself.

The deficit stood at 56.1% of the fiscal year target of 5.3 trillion rupees (around $82bn) compared to 48.4% in the same period last year.

"Inflow to the local markets has eased recently," K Chandrangathen, chief forex trader at South Indian Bank, Mumbai, told IBTimes UK.

"Political issues facing the new government will also weigh on the rupee," he said, adding that he expects the Indian unit to weaken further towards 61.75/dollar.

The USD/INR jumped to as high as 60.96 on Friday, two pips above the Thursday peak, to a new high since 25 April. On Thursday, the rupee had fallen 1.43%.

The dollar, based on a trade-weighted index that measures its strength against six major currencies, rose to a 10-month high of 81.54 on Wednesday after the second quarter GDP numbers surprised on the higher side.

Even though there was no clear indication of a sooner rate hike, the FOMC policy statement that came a few hours after the GDP data was hawkish enough to limit the correction in the greenback to marginal levels.

The rupee ended its second straight monthly drop on Thursday after losing ground from a near one-year high of 58.23 in May.

Technical Outlook

The USD/INR has just broken above a crucial resistance of 60.80 and a decisive move above this area will take it through 61.30 to a more important upper barrier of 61.80.

If that is broken, the pair will target 62.70 ahead of the big barrier of 63.50-63.90.

On the lower side, 60.0 and 59.60 are the immediate levels ahead of 59.00. Further south, a break of the May low of 58.20 will open the doors to 57.40 and there seems to be no stops until 55.20-55.10.