The Indian rupee strengthened on Monday for its fourth session in the past five as lower-than-expected inflation numbers further raised expectations the central bank will cut interest rates later this month to boost economic growth.
The rupee also rose after India delayed the implementation of controversial rules on tax avoidance to 2016, a decision expected to support capital inflows from foreign investors.
The potential for rate cuts is expected to support the rupee, although investors are worried about the impact of twin deficits, the current account and fiscal deficit, and are looking for signs that economic growth is bottoming out.
"It would be a relief for Indian markets that the long overdue rate cut is just round the corner. The rupee should prepare for a relief rally into 54.00-54.10," said J. Moses Harding, head of asset liability management at IndusInd Bank.
"It is not the start of a bullish trend. It is only a bit of a relief to see the rupee shed weakness and get into consolidation mode till fresh cues emerge on macroeconomic dynamics. The concerns on twin-deficits are solid with no quick-fix solutions despite support to growth from a rate reversal cycle."
The partially convertible rupee closed at 54.4950/5050 per dollar versus its previous close of 54.7550/7650 on Friday. The unit moved in a wide range of 54.42 to 54.82 during the day.
Gains were sparked after the wholesale price index rose 7.18 percent in December, below a forecast of 7.4 percent in a Reuters poll, and marking its slowest pace of growth in three years.
Traders also saw good dollar selling by custodian banks after the BSE share index rose more than 1 percent to two-year highs on the back of the inflation data and the delay in the General Anti-Avoidance Rules.
Foreign funds have bought shares worth more than $1.5 billion so far in 2013 after having pumped in $24.55 billion in 2012.
In the offshore non-deliverable forwards, the most-traded one-month contract stands at 54.79, while three-month is at 55.32.
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 stand at around 54.61, with the total traded volume at $4.57 billion.