The Indian rupee rose on Tuesday on the back of inflows from Bharti Infratel's initial public offering and expected dollar sales from a share sale by state miner NDMC, but data showing a high trade deficit weighed on investor sentiment.
The rupee will likely continue to be supported by share flows in the near term as the government looks to raise $5.5 billion by next March as part of its plans to bridge its current account deficit by selling stakes in companies.
The success of that programme and the government's fiscal discipline are seen as essential to the rupee's outlook, amidst concerns about slowing economic growth.
"The bigger driver for the rupee in the near term is going to be inflows. I expect the rupee to move towards 53.20 levels to the dollar in the January-March quarter," said Subramanian Sharma, director at Greenback Forex.
The partially convertible rupee closed at 54.26/27 per dollar, stronger than its close of 54.49/50 on Monday.
Traders attributed the rupee's gains to the IPO from Bharti Infratel, the telecommunications tower unit of top Indian phone carrier Bharti Airtel Ltd, which is set to raise up to $832 million in what would be the country's biggest initial share offering in two years.
The share sale opened for retail investors on Tuesday. Bharti on Monday said it had allotted shares worth $120 million to cornerstone investors.
The IPO is likely to be followed by the government's up to $1.1 billion stake sale in NMDC Ltd.
However, investors remain worried about the country's current account deficit, a continued source of concern for the rupee's outlook, after data showed the November trade gap remained high at $19.3 billion.
"Overall, India's external sector remains in a precarious state," Nomura said in a note after the data.
In the offshore non-deliverable forwards, the one-month contract was at 54.58, while the three-month was at 55.10.
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 at around 54.47, with total traded volume of $4.5 billion.