The rupee gained, reversing earlier losses, after Prime Minister Manmohan Singh said he has enough political backing to stay in power while his Communist allies withdrew support.
The currency rebounded from a one-week low after the Samajwadi Party pledged support to a nuclear deal with the US, which the Communists have opposed.
Singh, attending the Group of Eight meeting in Japan, said his government isn’t affected, easing concerns that political instability will spur global funds to pull their money out.
“The rupee rebounded because concerns about the government’s stability have now eased,” said V. Rajagopal, chief currency trader at Kotak Mahindra Bank Ltd in Mumbai.
“Investors are reassured because the government has enough political support,” Rajagopal said.
The rupee gained 0.1% to 43.2625 per dollar at the 5pm close of trading in Mumbai, according to data compiled by Bloomberg. It fell as low as 43.42 earlier.
The Communist parties, which supported the ruling coalition for the past four years, withdrew their backing as the government proceeded with talks over the nuclear energy accord with the US.
The rupee fell earlier on speculation that losses in Asian equities will prompt global money managers to reduce investment in the region.
Data from market regulator Securities and Exchange Board of India, showed funds based abroad sold more Indian shares than they bought on 28 of the past 34 trading days.
“Overseas equity markets are weak and that sentiment is spilling over into local markets,” said Puneet Sharma, chief currency trader at state-owned Allahabad Bank.