A day after the Reserve Bank of India (RBI) allowed greater access to foreign funds to invest in government-backed securities, the Indian rupee gained 38 paise on Wednesday to close at a five-week high of 65.58 against the US dollar.
The partially convertible Indian rupee closed at 65.58 to a US dollar from its previous close of 65.96 to a greenback. It touched a day's high of 65.58 levels at the Interbank Foreign Exchange market here.
"The strengthening of rupee was in line with the trend of other major Asian currencies which have risen against the dollar on Wednesday," Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS.
All the major Asian currencies appreciated by close to one percent against the US dollar.
"The quarter-end dollar selling by the information technology (IT) companies and yesterday's RBI announcement of giving greater access to foreign funds to invest in central and state government bonds also supported the trend," Banerjee said.
The RBI's decision on Tuesday is expected to usher in around $2.5 billion by this fiscal end.
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On Tuesday, the Reserve Bank said that it intended to provide a more predictable regime for investment by foreign funds and decided to raise their exposure limits in phases in central government securities to 5 percent of the outstanding stock by March 2018.
In another key decision, the central bank had set a separate limit for investment by such funds in state development loans, which are to be increased in phases to reach 2 percent of the outstanding stock by March 2018.
Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services said: "Today's gains came on the back of RBI's rate cut on Tuesday, that has buoyed both the currency and equity markets."
The Indian equity markets continued their upward trajectory after the RBI on Tuesday cut key lending rates by 50 basis points. The markets were anticipating an easing of only 25 basis points.
The barometer 30-scrip sensitive index (S&P Sensex) of the Bombay Stock Exchange rose 376 points or 1.46 percent on Wednesday.
According to Sharma, the rupee appreciation on Wednesday, was a result of calmer global markets. The markets on Tuesday were hit by negative news about the debt situation of Anglo-Swiss multinational commodity trading and mining company Glencore.
"Now that Glencore Commodities is trying address its debt issues, things seem to be settling down. The rupee appreciation did not happen much yesterday because the global markets were down," Sharma said.
The trend of strengthening rupee value might continue further said Hemal Doshi, chief currency strategist, Geofin Comtrade.
"The next crucial level to watch out for is 65.50. The trend seems to continue due to positive equity markets and in the absence of any major data points coming up on the last day of trade this week," Doshi told IANS.
The onshore Interbank Foreign Exchange market here will be closed on Friday on account of Gandhi Jayanti.