By Swati Bhat
MUMBAI (Reuters) - The rupee hit its highest level in seven weeks on Wednesday on rising rate cut hopes, but demand for the greenback from oil firms and custodian banks weighed and pushed the rupee marginally down on the day.
Early gains in the domestic share market along with foreign fund flows helped the rupee to rise to its highest level since end-February.
However, a sell-off in European stocks and dollar buying by state-run banks along with custodian bank demand pulled it off the highs.
"The rupee appreciation is temporary as there will be regular (dollar) buyers and hedgers chipping in like today. I think 54.50 is likely in the near-term with 53.50 being the max on the downside," said Samir Lodha, managing director at QuantArt Market Solutions.
The partially convertible rupee closed at 54.21/20 per dollar versus its previous close of 54.15/16. The unit rose to as much as 53.77, its strongest since February 28.
Rate cut bets have gained traction following marginal growth in factory output in February along with retail inflation nearing single-digits and wholesale inflation falling to three-year lows.
"Inflation coming down is positive, and means a good chance of a repo or a repo and CRR cut at the May 3 review," Lodha said.
"But the fall in gold prices will push up demand and not have any major impact on the current account deficit immediately," Lodha said, adding he recommends importers to increase their hedge ratios.
The fall in global commodity prices has boosted the rupee significantly in the last two sessions as it is expected to ease pressure on the country's record current account deficit which has been a key factor keeping the rupee weak this year.
In the offshore non-deliverable forwards, the one-month contract was at 54.41 while the three-month was at 54.97.
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 54.26 with a total traded volume of $8.35 billion.
(Editing by Bijoy Koyitty)