By Subhadip Sircar
MUMBAI (Reuters) - The rupee rose on Wednesday, yet remained within close of its record low hit last week, as outflows from equity markets added to concerns about the funding of the current account deficit ahead of the U.S. Federal Reserve's decision on its stimulus programme.
Such concerns have compounded because of the likelihood of the Fed tapering its bond purchases, which could trigger an outflow from emerging markets.
Foreign fund selling in Indian equities have picked up pace to add to the huge sell-off in debt markets.
Overseas investors have sold $485 million of Indian shares in five sessions, adding to outflows of $4.7 billion in 18 consecutive sessions of debt selling, as per capital market regulator data.
Inflows are crucial to bridge India's current account gap and will be needed to fund an estimated $90 billion gap in its balance of payments in the current financial year.
Faced with a sharp fall in the rupee, the government is scrambling to boost investor sentiment and is poised to raise various sectoral caps to boost foreign direct investment, which has slumped.
Dealers said the rupee found some support ahead of the auction of $7.15 billion of government debt quotas for foreigners on Thursday.
There was also some suspected dollar selling related to Unilever's open offer for its Indian unit which begins on June
21, traders said.
"The immediate cue for the rupee remains the FOMC. If the statement signals a tapering of stimulus, the rupee may breach 59 in early trades on Wednesday," said Navin Raghuvanshi, associate vice-president at Development Credit Bank.
"My overall view is bearish on the rupee unless the government takes some drastic steps."
All eyes are on the Fed outcome, due after the close of local trade on Wednesday, and any signs of premature stimulus withdrawal has the potential to roil the rupee.
Moses Harding, head of asset-liability management at IndusInd Bank, expects the FOMC to do a balancing act so as not to roil global markets.
"We need resolutions to in-house woes to trigger rupee recovery into 54-57 (to a dollar) and any undue delay in actions from the government will extend rupee weakness into 59-62," Harding said.
Credit Agricole has sharply lowered its rupee forecast to 59 to a dollar by end-September from 53.25, highlighting the currency's difficulty to fund its financial constraints.
The partially convertible rupee closed at 58.71/72 per dollar, as against its previous close of 58.77/78 on Tuesday, snapping two sessions of losses.
In the offshore non-deliverable forwards, the one-month contract was at 59.11, while the three-month was at 59.78.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 58.81 with a total traded volume of $5.6 billion. (Editing by Prateek Chatterjee)
