By Swati Bhat
MUMBAI (Reuters) - The rupee slipped from two-month highs to close flat on Thursday on the back of a short-covering rally in the greenback, but sentiment remains positive ahead of the central bank's policy meeting on Friday.
However, after market hours, the RBI warned of "very limited" space for further easing of monetary policy, striking a hawkish tone a day before it is widely expected to cut interest rates by 25 basis points for the third time this year. (Read full story http://in.reuters.com/article/2013/05/02/india-economy-rbi-idINDEE9410AY20130502)
Earlier in the day, data from HSBC's PMI showed India's factories lost momentum in April as output grew at its weakest pace in over four years, but a jump in export orders augured well for the coming months.
"I expect a 25 basis point rate cut tomorrow. A 50 bps rate cut will lead to INR appreciation but I seriously doubt a 50 bps rate cut, hence consider the range to be 53.75 and 54.24," said Samir Lodha, managing director at QuantArt Market Solutions.
"A 25 bps is well factored in the market price, so the statement will be important. If the statement is conservative, it should not be positive for the rupee as such," he added.
The partially convertible rupee closed at 53.81/82 per dollar compared with its close of 53.80/81 on Tuesday. The rupee rose to as high as 53.6625 during the session, its highest since February 28.
Financial markets were closed on Wednesday for a holiday.
Traders said the gains in the domestic sharemarket failed to have much impact despite the fact that there was good dollar selling by custodian banks.
Shares rose to mark their highest close since early February, as interest rate-sensitive stocks such as HDFC gained on hopes that the RBI will cut interest rates on Friday while TCS rose on value buying.
Dealers said dollar demand from oil importers also hurt the rupee while the euro's losses added to the negative sentiment.
Foreign funds bought shares worth $11.3 billion so far in 2013, helping the rupee gain 2.2 percent.
In the offshore non-deliverable forwards, the one-month contract was at 53.92, while the three-month was at 54.44.
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 around 53.94, with a total traded volume of $5.05 billion.
(Editing by Jijo Jacob)