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Indian rupee is likely to test 76-76.50 levels as a relatively strong greenback, boiling crude prices and COVID headwinds deepen the depreciation bias for the domestic currency, according to experts.
One of the significantly-hit Asian currency in recent months amid uncertain economic times, rupee is expected to see a consolidation in the vicinity of the current level before being pulled towards the depreciation bias.
While the equity market has been surging with occasional blips, the rupee has mostly been weak against the US dollar in recent months. If the domestic currency fell 2 per cent against the greenback, the slump was much lower at around 0.18 per cent in July.
Experts are of the view that the short term outlook for the USD-INR pair remains bearish, with prospects of 73.50 mark. On long-term trajectory, the domestic unit is likely to skew towards 75.50-76 level and could even test the 77-mark by year-end, they opined.
Some of the major factors that are going to dictate the trend for the rupee going forward include the Federal Reserve's outlook on rates and recovery of the US economy and the Joe Biden administration's stance towards China.
"The US Fed in its last policy meeting was hawkish but the central bank member’s stance on inflation, growth and the bond tapering programme going forward could trigger volatility for the greenback," said Gaurang Somaiyaa, Forex and Bullion Analyst at Motilal Oswal Financial Services.
On the domestic front, RBI policy statement together with the trajectory of the fund inflows into India will provide cues for the rupee movement. Inflation, which is on the higher side of RBI's expectation band, will be another factor going forward.
"In the last quarter, a surge in crude prices contributed to higher inflation and further rally in global crude oil prices could start to pinch the overall import bill of India," Somaiyaa said.
According to Jateen Trivedi, Senior Research Analyst at LKP Securities, in the longer run the trend will be weak for rupee, on the back of the dollar index stabilising above USD 90. Higher crude prices and COVID delta variant, which has resulted in partial lockdowns globally, will also not help the domestic currency.
Further, market participants will keep a close watch for any announcement on the bond tapering by the US and a faster American recovery could lead to a stronger dollar, a scenario that will weigh on emerging market currencies.
Sugandha Sachdeva, Vice President - Commodity and Currency Research at Religare Broking Ltd said the Indian rupee has seen a steep correction since June amid the surge in crude oil prices to multi-year highs and the strength in the US dollar index as the Fed took a hawkish tilt in its June policy meeting.
Muted actions by the FIIs in the past couple of weeks have also led to currency depreciation. Moreover, the threat of the fast-spreading delta variant of COVID has raised concerns about the economic recovery of emerging economies like India.
"FIIs inflows, growth outlook for the domestic economy, trajectory of crude oil prices, RBI's outlook on inflation, Fed's stance towards monetary policy, and the COVID curve are some of the key variables that shall steer the movement of the local currency in the near to medium term," Sachdeva said.
Sriram Iyer, Senior Research Analyst at Reliance Securities, expects the rupee to continue to weaken further in the second quarter of this fiscal.
"Range will be from 73.30 to 75.50. By the end of the year we expect the rupee to test 76.00-76.50 levels," he noted.
Domestically, the main concern for investors is the possibility of the third COVID wave.