The Indian rupee is expected to remain under pressure in the coming week due to heightened chances of a US rate, along with massive flight of foreign funds from the capital markets.
Besides, political bickering over the demonetisation drive and a stalemate on the contours of the Goods and Services Tax (GST) framework might lead to further erosion in the rupee's value.
"The rupee is expected to remain under pressure over the next week," Anindya Banerjee, Associate Vice President for Currency Derivatives with Kotak Securities, told IANS.
"The rally in US bond yields are expected to continue further, which means the dollar would gain more ground against an emerging market (EM) currency like the rupee."
Banerjee predicted the rupee would touch 68.80-69 levels during the short-term.
"Technically, the trend is upward for USD/INR as long as the pair holds above 68.00 levels on spot," Banerjee said.
"Indian equity markets can face further selling pressure, but Indian bonds would continue to stay resilient on the back of demand from banks."
According to Hiren Sharma, Senior Vice President and Head-Forex Advisory at Anand Rathi Financial Services, upcoming events like the OPEC (Organisation of the Petroleum Exporting Countries) meet, Italy's referendum and the FOMC (Federal Open Market Committee) meeting will have a major impact on the rupee's movement.
"The level of 68.85 is too important to break which RBI (Reserve Bank of India) is defending, and a comeback level for the rupee will be a support break of 68.25/67.75. So a broader range of 68.25 to 69.10 seems to be a likely range for next week," Sharma told IANS.
On last Thursday, the Indian rupee plunged to its new intra-day record low of 68.86 to a US dollar.
On a weekly basis, the rupee depreciated by 33 paise to 68.47 against a US dollar from last week's close of 68.14.
"Last week, the rupee tracked other EM currencies which fell against the US dollar. Strong US data and FOMC minutes had strengthened the rate hike scenario in December," Sharma explained.
"The off-loading of debt and equity by FPIs (foreign portfolio investors) has also been a major reason for the decline in rupee. But, the RBI has entered to sell US dollars at key levels and its involvement will perhaps limit a deeper decline in the rupee."
Experts blamed the massive decline in the rupee's value on the interest rate differential between India and the US.
Currently, India's interest rates are higher than that of the US. A surge in rupee liquidity and some US dollar shortage last week had pushed the forward premium below the levels warranted by the rate differentials.
A similar collapse in forward premia had occurred during 2011 and 2013. During both those years, rupee had depreciated against the dollar.
Another key reason has been the FPI pull-out from the Indian equities and bond markets.
In terms of investments, provisional figures from the stock exchanges showed a massive outflow of Rs 5,409.82 crore in foreign funds during the just-concluded week.
Figures from the National Securities Depository (NSDL) disclosed that FPIs were net sellers of equities worth Rs 5,22.12 crore, or $865.72 million from November 21-25.
Since November 8, when the government demonetised high denomination currency notes and the surprise victory of Republican Donald Trump in the US Presidential election, the Indian equity markets have seen foreign fund outflows worth Rs 15,952.69 crore (November 9-25).
"FPIs are least interested to chase long bonds at these yields and they are not showing much enthusiasm on the equity front too. All in all, rupee is drifting lower, only countered by spirited intervention from the central bank, which is using exchange traded derivatives and inter-bank market to sell US dollar," Banerjee added.
As per Devendra Nevgi, Chief Executive of Zyfin Advisors, the rupee's weakness could trigger a negative sentiment for foreign investors.
"The INR weakness though will benefit some of the sectors but could be negative for general sentiment of foreign investors. The yuan's weakness is also adding fuel to the fire of INR weakness," Nevgi said.
"The fall in bond yeilds too will narrow down the rate difference in US and Indian yeilds which is likely to keep INR on the weaker side, though RBI continues to intervene in FX markets."
(Rohit Vaid can be contacted at firstname.lastname@example.org)
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