The rupee strengthened to its highest level in nearly six months on Wednesday, as foreign banks and exporters sold dollars, tracking gains in local shares which fuelled expectations for further capital inflows.
At 10:50 am, the partially convertible rupee was at 44.34/35 per dollar, after hitting 44.25 in early deals, its strongest since April 15 and 0.8 per cent above Tuesday's close of 44.69/70.
"There is good dollar selling seen in the market today, most of it is offshore related. Rupee looks unlikely to break past 44.20 today with an expected trading range of 44.25-44.45," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
Dealers said cheaper offshore dollar compared with its onshore market counterpart provided arbitrage opportunities to banks that have access to both the markets.
The one-month offshore non-deliverable forward contract was quoted at 44.47, while the one-month onshore dollar was quoted at 44.59.
The BSE Sensex rose more than 1 per cent in early trade on Wednesday, with Reliance Industries leading the rise, driven by robust foreign fund inflows and strong world markets.
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Foreign funds have bought a record $20.1 billion of Indian equities so far this year, with more than one-third of that having come since the start of September.
Dealers expect foreign fund inflows to maintain pace at least until end-October.
"INR is appreciating as the capital flows keep on coming. USD is weaking against all the currencies globally. There is a rumour about quantitative easing too, that is also supporting the USD weakness," a Bangalore-based assistant general manager and forex dealer at a private bank said.
The dollar held near eight-month lows on the euro on Wednesday and ground towards last month's 15-year trough on the yen, weighed down by heightened expectations of Federal Reserve easing after Japan lined up its own reflation tools.
The index of the dollar against six majors was marginally lower and would be watched, dealers said. Most Asian currencies too were stronger versus the dollar.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, MCX-SX and United Stock Exchange were all at 44.5075, with the total traded volume on the three exchanges at about $1.9 billion.