The rupee edged up on Friday as exporters cashed in dollars on the last trading session of the fiscal year, but the currency was on track to post its biggest monthly fall in four months and the outlook remains subdued.
Worries about capital inflows caused by proposed tax laws, uncertain growth prospects and widening trade and fiscal deficits could also weigh down the rupee in the coming months.
"Rupee fundamentals continue to stay weak guided by significant pressure on fiscal and trade deficit," said J. Moses Harding, head of the asset liability committee at IndusInd Bank.
India's current account deficit is expected to widen sharply from $16.9 billion in the September quarter, because of higher world oil prices and the country's heavy dependence on imports to fuel its economy.
The deficit for the December quarter is scheduled to be released later on Friday.
At 11:42 a.m, the rupee was at 51.14/15 to the dollar, stronger than 51.39/40 at close on Thursday when it fell more than 1% primarily due to dollar demand from oil importers.
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Firmer shares that rose more than 1% and overnight gains in the euro also helped the rupee crawl higher, traders said.
The currency has fallen 4.2% so far this month, its steepest drop since last November's 6.7% slide, and is down nearly 13% in this fiscal year.
Still, an 8.33% rally over January and February, powered by robust foreign investments in shares and debt, has lifted the rupee 3.9% this quarter which is the most since April-June 2009 when it gained 5.5%, according to Thomson Reuters data.
The government has projected a fiscal deficit of 5.9% of GDP for the current fiscal year, sharply above an initial forecast of 4.6%. It aims to bring it down to 5.1% in 2012-13 that begins in April.
The one-month offshore non-deliverable forward contracts were at 51.58.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and on the United Stock Exchange were all around 51.45, on a combined volume of $1.61 billion.