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After Narendra Modi was sworn in as India's prime minister late on Monday, investors are now focusing on his policies, which will help determine whether a recent rally in the rupee and in shares is justified.
New finance minister Arun Jaitley will be especially important as investors await a new budget, expected by early July, that will need to reassure markets that India can contain its fiscal deficit.
The new government will also need to decide on steps taken by the previous government to curb imports, which helped narrow the current account deficit to $1.2 billion in the March quarter, according to data late on Monday.
India has been able to narrow its current account deficit thanks to hefty foreign inflows, including net purchases of $5 billion worth of stocks and debt in the month so far, taking total inflows this year to more than $14 billion.
"Foreign fund flows have been strong and the continuation of those will be key for the rupee," said Uday Bhatt, a foreign exchange dealer with UCO Bank.
The partially convertible rupee closed at 59.04/05 per dollar compared to 58.71/72 on Monday. It moved in a wide 58.79 to 59.11 band during the session. The unit fell 0.56% on the day, its biggest single-day fall since March 20, when the unit had dropped 0.6 percent.
The rupee fell as the Nifty fell for a second consecutive session as investors continued to book profits in recent outperformers such as State Bank of India.
Investors will also focus on gross domestic product data for the March quarter, due to be announced on Friday, while the Reserve Bank of India is set to review policy on June 3.
In the offshore non-deliverable forwards, the one-month contract was at 59.23 while the three-month was at 59.82.
