The rupee climbed to its highest in a month on Monday after robust factory output, and buoyed by a return in risk taking globally after strong data in the United States and China.
At 9:45 am, the partially convertible rupee was at 46.29/30 per dollar, after touching 46.2650, its highest since Aug. 10 and stronger than the close of 46.47/48 last week.
"There is some dollar selling seen after the strong IIP data. We could see a move towards 46 levels this week, but then it should start weakening again from there," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
India's industrial output accelerated much faster than expected in July on surging capital goods production, strengthening the case for further monetary tightening by the central bank to tame near double-digit inflation.
Dealers said gains in the euro and other Asian peers also boosted sentiment for the rupee.
Almost all Asian currencies were stronger compared to the dollar. The index of the dollar against six majors was down 0.5 per cent.
The euro surged on Monday as positive market sentiment following upbeat Chinese data and a lack of surprises from new banking rules sent it nearly 1 per cent up on the dollar.
The BSE Sensex were trading up 1.5 per cent, taking cues from the better-than-expected jump in factory output and strong Asian markets.
Foreign fund flows into local shares are a key determinant of the rupee's fortunes. So far this year, foreigners have bought shares worth more than $13.5 billion, in addition to last year's record $17.5 billion purchases.
One-month offshore non-deliverable forward contracts were at 46.44, weaker than the onshore spot rate.
"With US data continuing to be strong, we expect risk appetite to be positive this week. We expect the INR to play catch up with its regional peers, with USD/INR trading in a range of 46.10-46.70, with a downside bias," economists at Barclays Capital wrote in a note.
They expects the Reserve Bank of India to hike the repo and reverse repo rates by 25 basis points each at the central bank's policy review on Thursday.
