Mumbai: The rupee extended gains into a second straight day on Friday helped by robust domestic shares, which raised hopes for more capital inflows while early gains in the euro against the dollar aided sentiment.
The partially convertible rupee closed at 46.66/67 per dollar, 0.4% stronger than its previous close of 46.8525/8625. The rupee edged up 0.2% on the week.
“The rupee was largely steady through the day after the higher opening tracking shares and the euro’s gains but later there was some demand in the market which limited gains,” the chief dealer with a large private sector bank in Mumbai said.
Other dealers said there was some dollar demand in the market from the Haj pilgrimage panel, which capped the rupee gains. Traders expect an outflow of around $50 million to $75 million on account of the dollar demand from the Haj buying.
Dealers said gains in other Asian peers also boosted rupee sentiment.
The index of the dollar against six major currencies was down 0.1%.
The euro slipped off two-month highs against the dollar on Friday with investors booking profits ahead of the weekend as strategists said its recent rally would peter out due to lingering worries about the euro zone economy.
Gains in local shares provide cues on direction of capital flows, which has a key influence on the rupee’s fortunes. So far in 2010, foreign investors have bought a net $6.8 billion worth of shares, adding to record inflows of $17.5 billion seen in 2009.
Indian shares notched their best weekly rise in three days as they gained 1%, with telecom stocks cheering an upgrade by Credit Suisse and Infosys Technologies testing a new high on better earnings expectations.
Dealers said the rupee would continue to be rangebound between 46.25 to 47.25 over the next week and they were awaiting the Reserve Bank of India’s policy at the end of July.
“The quantum of the rate rise is an issue. Market participants are expecting a 25-50 basis points hike, but I see only a 25 basis points increase,” said Vikas Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
The rupee is expected to rise over the year due to the rate hikes as the interest rate differential between developed economies and India widens and makes investment in India an attractive option.
The RBI is likely to raise interest rates again in its quarterly review on 27 July, a new survey found, and rates at the end of the year are likely to be higher than forecast before Friday’s unexpected 25 basis point rise.
One-month offshore non-deliverable forward contracts were quoted at 46.85, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX closed at 46.7725 and 46.7825 respectively, with the total traded volume on the two exchanges at a low $2.8 billion.