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Mumbai: The Indian rupee strengthened on Thursday to close at more than four-month high against the US dollar tracking domestic equities.

The domestic currency closed at 73.00 against the US dollar, a level last seen on 1 September 2020, up 0.4% from its previous close of 73.03.

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"Rupee traded in range after a gap-up opening as risky assets keep their outperformance continuing on back of fund inflow globally. Some RBI intervention being witnessed which helped the rupee to not fall briefly below 72.90. Risky asset performance shall keep rupee buyer interested. Broadly, range can continue between 72.60-73.40," said Jateen Trivedi, senior research analyst (commodity and currency) at LKP Securities.

The Indian rupee has been near its fair value under a broader real effective exchange rate index of 40 currencies, according to a working paper released in the central bank’s monthly bulletin.

The new real effective exchange rate (REER) indices have remained around the benchmark (base year value of 100) for most part of the sample period from 2004-05 to 2019-20, reflecting India’s external competitiveness has improved, RBI officials John V. Guria and Jitendra Sokal wrote in the bulletin.

The new series shifts the base year from 2004-05 to 2015-16, existing basket expanded to 40 currencies from 36, with the inclusion of eight new countries and deletion of four. Inflation differentials between India and its major trading partners have declined and stabilized after the adoption of the new inflation targeting framework, which works well for India’s competitiveness, according to the bulletin.

As large capital flows, unless absorbed, can cause rupee appreciation, a focus on price stability should remain a policy priority as otherwise it can lead to an erosion of export competitiveness, it added.

Indian benchmark equity indices settled lower on Thursday led by a decline in telecom and realty stocks. Sensex closed at 49,624.76, down 167.36 points or 0.34%, the broader index, Nifty closed at 14590.35, down 54.35 points or 0.37%.

The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.29% to 90.22.

Foreign institutional investors have bought net of $32.49 billion in equity market and are net sellers of $5.43 billion in debt markets since the beginning of the fiscal year, while domestic institutional investors sold 1.24 trillion in stocks, according to data on the exchanges.

Bloomberg contributed to the story

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