By Swati Bhat
MUMBAI (Reuters) - The rupee strengthened to its highest level in more than a month on Thursday as the government's move to partially deregulate diesel prices boosted hopes the widening fiscal deficit would gradually come down.
State-run oil marketing companies can now raise diesel prices in line with increases in global crude oil prices, Oil Minister Veerappa Moily said, a move that could help the government reduce its vast subsidy bill.
However, Moily said the government cannot abruptly put an end to diesel subsidies.
Traders said a gradual rise in diesel prices would also reduce its inflationary impact and in the medium term bring down the fiscal deficit but oil marketing companies are yet to announce any hike in prices.
"Rupee rose mainly on the diesel news. There were some flows heard of in the morning and the euro also ran away in afternoon trade which further boosted the INR," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
"In the near-term, I expect the pair to hold in a 53.60 to 54.50 range. Tomorrow we may test 54.05 levels," he added.
The partially convertible rupee closed at 54.3850/3950 per dollar versus its previous close of 54.69/70.
Traders said gains in the domestic share market also aided sentiment.
Shares advanced for the third time in four days, led by gains in state-run oil companies after the government's move. <.BO>
Bullish bets on the Indian rupee fell in line with most other Asian currencies, according to the latest Asia wide forex positioning survey of 14 analysts.
In the onshore forwards, the three-month premium dropped to 97 points from 98.75 previously while the 1-year dropped to 333.75 from 342 on the back of the rupee's gains but premiums expected to stay high in the near-term.
"RBI's dollar funding window will keep 1-3M FX premium at elevated levels to lead forward supplies and lag forward demand for dollars," said J.Moses Harding, head of asset liability management at IndusInd Bank.
In the currency futures market, the most-traded near-month dollar/rupee contract on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.40 with a total traded volume of a high $7.7 billion.
(Editing by Anand Basu)