The Indian rupee rose on Wednesday aided by further steps from the central bank to curb speculative trading in the currency, although weak domestic shares and demand from importers kept larger gains in check.
India's central bank has asked state-run oil companies to buy dollars from a single bank, said a source privy to the advice from Reserve Bank of India, as the government struggles to stem the declining rupee.
The request comes after India's regulators toughened rules for derivatives trading in the currency market in a bid to arrest the steep decline of the rupee.
Traders are anticipating more measures, with speculation on Wednesday that the RBI may mandate physical delivery for companies that hedge their FX exposure using letters of credit, compared to the current practice of allowing cancelling and re-booking of hedging contracts.
Still, India's high current account deficit remains the biggest stress on the currency - a concern at a time when oil prices are rising, with U.S. crude futures hitting a 14-month high.
"The RBI and the government have to come up with certain strong steps. Otherwise rupee at this level and oil again inching up to $110 a barrel could be very harmful to the economy," said Uday Bhatt, a currency dealer with UCO Bank.
The partially convertible rupee closed at 59.66/67 per dollar compared to 60.14/15 on Tuesday, after moving in a 59.63 to 60.21 band during the day.
In the onshore forward market, the 6-month contract dropped to 182 points from the day's high of 184 points, while the 1-year contract fell to 356 points from a high of 361.25 points, post the market chatter on more measures.
Traders say for now the RBI is likely to be the first line of defence against the rupee, especially as government ministers are reported to be at odds over proposals to relax rules on foreign direct investment in defence, telecoms, pharmaceuticals and retail.
"The central bank is not targetting any level or trying to influence the rupee's direction. But considering the economic situation, they clearly don't want the rupee to be hit by speculative trades," a senior dealer at a state-run bank said.
In the offshore non-deliverable forwards, the one-month contract was at 59.99 while the three-month was at 60.71.
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 59.95 with a total traded volume of $4.8 billion.