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By Gaurang Somaiya

The rupee continued to be under pressure, but the pace of the weakness was slower compared to what we saw in the past few months. The currency fell 1.40 per cent in October, and year-to-date depreciation has been to the tune of 13 per cent.

Crude oil, which has been one of the important factors that led to weakness in the rupee, has stabilised after comments from the Saudi minister, hinting at increasing supply if needed.

Oil markets remained tense ahead of the looming US sanctions against Irans crude exports. In the past three weeks, rupee has perfectly replicated crude oils move and fallen against the US dollar, however, we expect that any uptick in global crude oil prices could add further pressure on the currency.

On the domestic front, fiscal deficit for the first half of the year touched 95.3 per cent on the budgeted estimate compared with 91 per cent in the same period last year. Fiscal deficit target for FY19 is 3.3 per cent of GDP at Rs 6.24 lakh crore.

In a move to support and curb the volatility of the rupee, the Reserve Bank of India is actively intervening and that is reflecting in depleting forex reserve. At the start of the year, forex reserve stood at $411 billion, which have eroded at a faster pace and now stands at $394.50 billion– fall of over $17 billion.

FIIs too have been continuously pulling out funds from the equity and debt segments and yearly outflows have been to the tune of $13.6 billion, suggesting that FIIs have not been too confident in investing in Indian markets due to host of domestic and international factors and also the elections scheduled next year.

State elections will also be in focus and by the end of this year we will be having results for a few major states that will set the tone for general elections scheduled at the first half of next year.

For the month, we expect the rupee to remain under pressure and could fall towards 74.70, and below, which it could head towards 75.25. On the higher side the rupee faces resistance at 73.50 and 73.05 level.

(Gaurang Somaiya is Currency Analyst at MOFSL)

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