The rupee notched its biggest one-day gain in a year on August 30 against a wobbly dollar as local equities saw a rush of foreign investor inflows.
The partially convertible rupee surged 0.6% to 79.45 in its best session since August 27, 2021. The currency had hit a record low of 80.12 on Monday, but closed at 79.9625.
India's Nifty 50 stock index soared 2.7% as investors returned to buy the dips after a recent selloff. Overall, local equities have seen foreign investor inflows of about $6 billion in August, the highest since December 2020.
August also marked the first month this year when overseas investors turned net buyers of India's government debt. On the day, yield on the 10-year paper dropped 6 basis points to 7.1893%.
HSBC analysts became more optimistic about the rupee, citing a pullback in commodity prices and return of inflows supporting the currency, in addition to support from the country's central bank.
"While we think the USD/INR pair can still rise further, we see scope for the rupee to outperform some other "deficit" peers temporarily," they wrote in a note.
The rupee's strength on Tuesday comes after the Reserve Bank of India (RBI) stepped in to prevent the currency from trading under 80 per dollar in the previous session, traders had told Reuters.
The dollar index losing steam ahead of U.S. jobs data also lifted market sentiment.
However, with the Federal Reserve determined to keep interest rates higher for longer, even as recession looms in the world's biggest economy, it could boost near-term volatility, analysts warned.
"Amid global turmoil and weakness in major Asian peers like the Japanese yen and the Chinese yuan, it will be interesting to see to what extent the RBI succeeds in protecting the USD/INR pair," said Amit Pabari, managing director at consultancy services provider CR Forex.
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