Rupee gains for third day, closes at 55.36

Gains in the euro and sharp gains in domestic stocks signal improved demand for rupee

The rupee strengthened against the dollar for a third straight session on Wednesday, tracking gains in the euro and as sharp gains in domestic stocks signalled improved demand for risk assets.

The local unit has stayed well above the record low of 56.52 hit on Thursday, though few analysts are yet willing to call for a sustained rebound given the continued worries about the global economy and the slump in confidence on India's own outlook.

Indian markets are headed for what promises to be a volatile month, featuring Greek elections and a Federal Reserve meeting among key global events, as well as inflation data and a critical Reserve Bank of India policy meeting at home.

"Taking into consideration the external and internal economic factors, we feel that depreciation in the rupee would continue in the next two-three months and we expect the currency to test levels around 57 to 57.50," said Dinesh Thakkar, chairman and managing director at Angel Broking.

However, Thakkar expects the rupee to rebound towards 54-53.60 in the near-term.

The partially convertible rupee ended at 55.36/37 to the dollar, as per the SBI closing rate, after trading in a range of 55.32 to 55.61. It had ended at 55.64/65 on Tuesday.

Demand for risk has improved somewhat, with the euro gaining on Wednesday as investors cut hefty short positions, despite continued concerns about Spain's troubled fiscal situation.

However, the European Central Bank left interest rates at 1% later on Wednesday, dashing some market expectations that it might move quickly to combat fears about the health of the euro zone.

Rising expectations the RBI will cut rates are at least helping improve a bit of the confidence in the Indian economy, sending domestic stock indexes up over 2%, and helping improve sentiment for the rupee.

Traders said gains in the rupee were limited as oil firms stepped in to buy dollars, as they are expected to continue to do at opportunistic levels.

The one-month offshore non-deliverable forward contracts were at 55.72 while the three-month was 56.46.

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 ended around 55.56 on a total volume of $3.9 billion.