Monetary easing in China, strong domestic economic fundamentals and a recovery in equity markets strengthened the Indian rupee to touch an intra-day high of 65.86 against a US dollar on the foreign exchange markets.
The rupee closed at the 66.07-mark, gaining 56 paise from Monday's close of 66.64. The rupee touched a low of 66.90 during the day's trade -- a new 23-month low.
"It seems to be a case of Reserve Bank of India's intervention and selling by exporters. The RBI it seems had intervened after the rupee depreciated above 66.70 mark," Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services, told IANS.
"Rupee has also followed the recovery trajectory of the equity markets."
The rupee gained strength a day after a massive sell-off in the Indian equity markets pushed the Indian rupee to a new 23-month low of Rs.66.79 to a dollar.
Analysts cited that Tuesday's catalyst for the rupee's rise eminated from the People's Bank of China (PBOC) inter-policy rate cut decision.
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The PBOC administered a cut of 25 basis point in key lending rate and 50 basis points in the reserve requirement ratio (RRR).
The RRR cut for financial institutions will be applicable from Sep 6, the key lending rates easing will be effected from Wednesday.
"The rate cut announcements in China did help the rupee position strengthen. It has to be seen if this is a relief rally or just an one-off reaction. It is expected that the Chinese government will take further measures like these to propel growth their-- this might put pressure on yuan," Anindya Banerjee, senior manager for currency derivatives with Kotak Securities, told IANS.
"RBI seems comfortable with rupee ranging anywhere below the 66.50-mark. Further yuan devaluation could adversely impact rupee."
The yuan has fallen by 4.6 percent till now since August 11.
The world markets are fearful of the fact that with a weak yuan, the $10 trillion-dollar-worth Chinese economy has the ability to dump unlimited amounts of goods and services, thereby cornering the entire international exports customers base.
The vicious speculation on the Indian rupee was also calmed after the Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday assured that the apex bank was ready and willing to use the massive foreign reserves to stabilise the currency.
"I'll say that relative to other countries India is in a good position with strengthening growth, a low current account deficit and narrowing fiscal deficit, moderating inflation, low short-term foreign currency liabilities and sizeable exchange reserves," he had said.
The appreciation in rupee value also follows the recovery which was observed on the barometer index of the Indian equity markets.
The barometer 30-scrip sensitive index (Sensex) of the S&P Bombay Stock Exchange (BSE) closed at 26,032.38 points, up 290.82 points or 1.13 percent from its previous close at 25,741.56 points.
A similar trend played out at the the National Stock Exchange (NSE), where the broader 50-share CNX Nifty closed higher at 7,880.70 points, with a gain of 72 points, or 0.92 percent.
On Monday, the S&P BSE Sensex plunged by 1,624.51 points, or 5.94 percent -- its steepest fall in terms of points so far.