The rupee had depreciated by 39 paise, logging its biggest daily loss in nearly two months, to end at 61.34 on Thursday on fears of capital outflows from emerging markets after Federal Reserve signalled a sooner-than-expected hike in US benchmark interest rates.
The rupee had gained 24 paise to close at nearly one-week high of 60.95 against the dollar yesterday following selling of the US currency by exporters and some banks, amid sustained heavy capital inflows.
Whether the rupee can regain that momentum will largely depend on foreign investors, who have been net buyers of more than $2 billion in shares over the previous 20 sessions and of $2.3 billion in bonds in March.
Overseas funds have also become strong buyers of debt, with net purchases of $5.6 billion so far this year.
Traders hope elections will see BJP winning a majority to usher in reforms and pull the economy out of the current slow growth.
Dealers attributed the fall in rupee to dollar's gains against euro overseas
The rupee had gained nine paise to close at nearly one- month high of 61.84 against the dollar in yesterday's trade after the government said in the interim Budget that fiscal deficit this financial year will be capped below target.
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In New York market, the dollar lost ground against most major rivals on last Friday amid mixed US data on industrial production and consumer sentiment.
The partially convertible rupee ended at 62.2825/2925 per dollar.
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The rupee has avoided the heavy losses suffered by some emerging Asian currencies such as the Philippine peso this year because of its efforts to narrow the current account deficit, and strong foreign investor inflows.
The cost of holding one-year forward dollars rose to 482.75 basis points from 472.75 bps on Tuesday.
The rupee was largely rangebound for most of the trading day in the absence of any major cues ahead of the Reserve Bank of India's rate-setting meeting next week.
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In New York, the US dollar gained against most rivals on last Friday, as a week of data reassured investors that December's dismal employment report wasn't indicative of a broader shift in the economy.
New York's main contract, West Texas Intermediate for February delivery, was up 22 cents at USD 98.64 in mid-morning trade while Brent North Sea crude for February rose 17 cents to $ 110.97.
It fell 11 per cent in 2013, its third successive annual loss.
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Traders say the outlook for the rupee has improved on the back of a sharp narrowing in the current account deficit after government and central bank emergency measures such as curbing gold imports.
The currency's relatively stable performance even as the US announced tapering showed India's better preparedness to deal with any fallout of such foreign fund outflows.
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Dealers cited some dollar selling by state-run banks in the session, which some said may be on behalf of the central bank.
The partially convertible rupee closed at 62.09/10 per dollar compared with Tuesday close of 62.01/02, a fifth day of losses out of six.
The RBI is widely expected to raise its key repo rate by 25 basis points to 8.00 per cent on Wednesday, its third such hike in four months after recent data showed both wholesale and retail inflation at multi-month highs.
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