Mumbai: The rupee strengthened to its best level in a month on Monday buoyed by gains in the domestic share market and a broadly weaker US dollar.
The partially convertible rupee closed at 46.29/30 per dollar, off a high of 46.2675, its highest since 4 December, but well above its close of 46.61/62 last Friday.
“The rupee was mainly stock market driven and tracked the broadly weak dollar,” said Ashtosh Raina, head of foreign exchange trading at HDFC Bank, who expects the near-term target for the rupee at 46.20.
The dollar dipped on Monday, reversing earlier gains as caution set in ahead of key US data, leaving investors wary of pushing the US currency up further after it hit a four-month high versus the yen.
However, the index of the dollar against six major currencies was down 0.74%, strengthening the rupee.
One-month offshore non-deliverable forwards contract were quoted at 46.23/31, little changed than the onshore spot rate.
Some investors were buying dollars in the offshore market, where it was cheaper, and selling it onshore to arbitrage the price differential, helping the rupee to firm up in the spot market during intra-day trade.
The gap between the onshore and offshore narrowed at close as traders took advantage of the arbitrage during the day. The spread stayed at an average of 5paise during trade.
Indian shares closed up 0.54% on their first trading session in 2010, with auto makers leading the gains after posting strong sales in December, propping up the rupee, dealers said.
In 2009, foreign portfolio buying of more than $17 billion of domestic stocks helped the rupee rise 12.2% from a record low of 52.2 hit in early March. It gained 4.7% last year.
“We expect the RBI to let the INR appreciate gradually against USD because of rising inflation and on our view that other Asian currencies will also appreciate,” Sonal Varma, economist at Nomura said in a note on 31 December.
Nomura expects the rupee to appreciate to 42.3 by December 2010, according to the note.
In the currency futures market, the most traded near-month contracts on the National Stock Exchange and MCX-SX closed at 46.37 and 46.3650 respectively, with the total traded volume on the two exchanges at a record high $6 billion.