Rupee jumps on local shares; outlook remains negative

The rupee posted its biggest single session rise in ten months on Wednesday, propelled by gains in domestic equities and the euro, with dollar inflows also helping.

The partially convertible rupee ended at 48.95/96 per dollar, 0.8 stronger than Tuesday's close of 49.335/345, and its biggest single day rise since Dec. 1, 2010.

"The rise was unexpected and was driven by the euro and stocks," said a senior foreign exchange dealer with a private bank.

The index of the dollar against six major currencies was at 77.017 points at end of rupee trade, sharply lower from 77.739 points on Tuesday, while the euro was at USD 1.3768 from USD 1.3611 previously.

The dollar index fell 1% as investors who had bought the greenback on concerns over the euro zone debt crisis were squeezed out of their short positions against riskier currencies including the euro, amid cautious optimism European leaders could agree on a solution to the region's problems.

German Chancellor Angela Merkel also voiced confidence, saying she was certain that by the time of the European Union summit on Oct. 23 there would be full ratification of the European Financial Stability Fund.

The BSE Sensex ended up 2.6% to its highest close in over three weeks as investors cheered results from IT industry bellwetherInfosys and shrugged off data suggesting growth in Asia's third-largest economy was losing steam.

Sustained gains in the local currency are, however, unlikely as worries over the global economy linger, amid high domestic inflation and slowing growth, analysts said.

"The rupee is facing a crisis of confidence, a condition which is likely to continue till the end of the current fiscal year," said Arun Singh, senior economist, Dun & Bradstreet.

The unit has already lost more than 8.5% from its 2011 peak and remains the worst performer among major Asian peers.

"Managing the trinity of policy rates, inflation and exchange rate will get challenging for policy makers as global factors have worsened more than anticipated and hurting domestic growth," Singh added.

Data released by the government showed that India's industrial output rose a lower-than-expected 4.1% in August as high interest rates, rising prices and the global slowdown curb investment and demand.

Subir Gokarn, a deputy governor at the RBI, said earlier that the central bank will change its monetary policy stance only if inflation eases and further rate increases will depend on the price rise situation.

All eyes are now on the monthly September inflation number on Friday for cues on the RBI rate decision due on Oct. 25.

India's wholesale price index probably rose 9.70% in September from a year earlier, easing slightly from 9.78% in August, a Reuters poll showed.

The one-month onshore forward premium on the rupee was at 19.25 points from 20.25 on Tuesday, the three-month premium was 57 points from 54.50 and the one-year premium was 120 points, from 114.50.

The one-month offshore non-deliverable forward contracts were quoted at 49.195, weaker than the spot rupee rate.

In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange ended at 49.0725 and those on the United Stock Exchange and the MCX-SX closed at 49.0750 respectively. The total traded volume on the three exchanges was USD 5.98 billion.