The rupee strengthened for the third straight session on Monday on the back of dollar sales by investors, following some clarity on certain taxation rules, as also by others looking to bid at the auction for government debt limits.
Investors are growing more hopeful of meaningful policy reforms at home after Prime Minister Manmohan Singh, a former Reserve Bank of India (RBI) governor, took charge of the finance ministry.
The government released draft rules on Thursday and said the general anti avoidance rules, or GAAR, would not apply retroactively, a big concern for portfolio investors.
"I think after the clarification on GAAR and P-notes (participatory notes) there have been some inflows. Foreign banks were the major sellers today," said Uday Bhatt, a dealer with state-run UCO Bank.
"I think the near-term outlook is positive for the rupee and the unit can rise up to 54.50 in the near-term. The range for the week is expected to be 54.50 to 56," he added.
Traders, however, said the volumes in the market were lower than average due to the RBI's quarterly closing of accounts.
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Some traders, however, speculated the central bank may have also stepped in to sell dollars via state-run banks after the rupee slipped towards 56, though the view was held only by a small minority.
The rupee settled at 55.43/44 as per the State Bank of India closing levels, versus 55.6050/6150 at previous close.
"There was also some dollar selling by investors looking to participate at the G-sec (government securities) limits auction and want to book at a higher rate," a senior dealer with a state-run bank said.
The government increased foreign investor limits in government bonds by $5 billion to $20 billion. The new limits will be auctioned by the Securities and Exchange Board of India (SEBI) on July 4.
One-month offshore non-deliverable forward contracts were at 55.75 while the three-month was at 56.48.
CRISIL said in a note it puts two in three chance of the rupee appreciating to 50 per dollar by end-March 2013.
"The key underlying assumptions include the initiation of some domestic policy measures to revive growth, no further worsening of our expectation of growth and inflation and an easing of current account deficit due to softening of crude and commodity prices," the analysts at CRISIL wrote.
"Some improvement in the euro zone situation in the first quarter of 2013 is also accounted for, which will stimulate return of capital flows into Indian markets," the note said.
Indian factories in June stepped up production and hired workers at the fastest rate in more than two years, but sagging demand abroad took a toll on growth in new export orders, a survey showed on Monday.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, the United Stock Exchange and the MCX-SX all ended at 55.6850. The total volume was at $4.5 billion.