Mumbai: The Indian rupee on Tuesday closed 0.43% lower against the dollar from its Monday levels on short-covering by foreign banks.

The rupee strengthened in morning trade and held steady from its previous close for most part of the day. Short-covering completes the leg of a transaction in which the seller buys an asset that he had sold earlier without having the possession of it.

The rupee gained in the morning after some of the custodian banks sold dollars and robust fund inflows added to the optimism in the currency markets, dealers said.

The domestic currency ended at 61.8913, down from its previous close of 61.6237. In the morning trade, the currency had strengthened as much as 61.455 and weakened up top 61.9450 a dollar level.

“Almost all foreign banks short-covered, leading rupee to fall. Reserve Bank may have offered some support at the fag-end," said a senior currency dealer with a foreign bank who did not wish to be named.

So far this year, rupee has fallen 0.12%. During this period, the foreign institutional investors have bought equities worth $422.6 million from the local bourses.

The yield on India’s 10-year benchmark bond ended at 8.554%, compared with its Monday’s close of 8.529%. The yields fell to 8.493% in the intra-day trade. Bond yields and prices move in opposite directions.

The 10-year bond yield has been falling since 9 January on hopes that the Reserve Bank of India (RBI) will not go for a hike in its key rates in the January monetary policy review in the backdrop of falling inflation.

The dollar index, which measures the US currency’s strength against major currencies, was trading at 81.320, up 0.12% from the previous close of 81.225.

The 30-share bellwether equity index, Sensex on BSE ended at 21,251.12 points, up 0.22%.

The rupee’s gain this year is small, considering the improvement in the current account, according to HSBC Holdings Plc.

“Given their high yielding status, the rupee and Indonesia’s rupiah should have been leading the pack in terms of a stronger recovery," HSBC analysts including Paul Mackel in Hong Kong, wrote in a research report on Tuesday.

“The lack of a positive follow-through so far this quarter is a concern."

Three-month offshore non-deliverable forwards were at 63.13 per dollar, data compiled by Bloomberg shows.

Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Bloomberg contributed to this story.

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