"I reckon RBI will simply allow a slow drift higher, while making sure that expectations of a large move higher do not build."The Indian rupee is likely to begin the week on the defensive after it weakened past an important level on Friday amid a buoyant U.S. dollar.
The one-month non-deliverable forward indicated that the rupee will open near 84.08 to the U.S. dollar, compared with 84.06 in the previous session and past the lifetime low of 84.07.
The local currency on Friday dipped past 84 for the first time, a level that the Reserve Bank of India (RBI) was defending over the last two months.
The rupee falling past 84 "is definitely a big deal" and this week will be "significant" to gauge its immediate outlook.
"What will RBI do now that 84 has been taken out? Will it push (dollar/rupee) back below that level or will it allow a measured move higher?," a currency trader at a bank said.
"I reckon RBI will simply allow a slow drift higher, while making sure that expectations of a large move higher do not build."
Dollar perks up
The dollar index was holding above 103 on Monday, adding to its 2.5% rally over the last two weeks. The weakness in the Chinese yuan following somewhat disappointing stimulus announcements over the weekend boosted the dollar.
Having fallen to a year-to-date low of 100.15 late last month, the dollar index has found support from expectations that the Federal Reserve will deliver a 25-basis-point rate cut next month, not the 50 bp that it had opted for in September.
Equity Flows
Foreigners taking money out of Indian equities have played a large part in the rupee's dip past 84 and traders will be watching what happens to these flows this week.
Meanwhile, Hyundai India's USD 3.3 billion initial public offering is expected to provide relief for the rupee.
