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After the government's pep talk, the rupee today made a stunning comeback, snapping a six-session losing streak to rise by 135 paise and close at 63.20, its second-biggest rise in a decade in absolute terms.
Comments from the government and the Reserve Bank of India, which came after the rupee slid to an all-time intra-day low of 65.56 yesterday, boosted sentiment and also helped local shares rally.
Finance Minister P Chidambaram yesterday said the rupee is undervalued and has overshot appropriate levels while asserting there is no need for excessive and unwarranted pessimism. The Reserve Bank said it has adequate foreign exchange reserves to deal with the declining rupee.
After opening higher at 64.30 in the foreign exchange market, the rupee immediately dropped to a low of 64.75 on initial weakness in equities. It rebounded and shot up at the fag end to settle at 63.20, a rise of 135 paise or 2.09%. Previously, it had flared up by 152 paise, or 3.08 per cent, on May 18, 2009.
"Nationalised banks were selling dollars, probably on behalf of the Reserve Bank. Corporates also sold dollars today as they expect that the government and the RBI are serious towards curbing volatility in forex market," said Agam Gupta, managing director and head of fixed income trading at Standard Chartered Bank.
Barclays cut its forecast of India's FY13-14 current account deficit to about $68 billion from about $80 billion earlier and said the country may be able to almost fully fund the CAD. It said the rupee may recover to about 61 per US dollar in the next 12 months, largely on the back of a narrowing CAD.
The benchmark S&P BSE Sensex gained 206.50 points, or 1.13%, after yesterday's 2.27% rise. Foreign institutional investors pulled out Rs 1,277.64 crore yesterday, as per provisional data with stock exchanges.
The dollar index was up by 0.10% against its major rivals ahead of the Federal Reserve's annual gathering.
