Rupee near one-month high; traders await WPI data

Hopes for prolonged easy monetary policy in the US boosts emerging markets

The rupee rallied to a near one-month high on Monday, with stocks and bonds joining in, as hopes for a prolonged easy monetary policy in the US boosted emerging markets.

However, traders said domestic concerns such as inflation and decade-low economic growth were likely to cap extended gains.

At 10.30 am, rupee was trading at 62.70 per dollar against Friday's close of 63.48/dollar.

After hitting series of record low in August, the rupee is showing signs of stability after the new Reserve Bank of India governor announced a slew of measures to attract inflows.

Going ahead, the Federal Open Market Committee's meeting on 17 and 18 September will crucial for all the emerging market currencies including the rupee as the meeting is expected indicate the US Fed's stance of the asset buying programme.

Traders, however, said Monday's rally was only a knee-jerk reaction and markets would again start focusing on the domestic fundamentals soon, which would keep trade choppy heading into the central bank's monetary policy decision on Friday.

The benchmark 10-year bond yield was trading down 7 basis points at 8.42%.

News that Lawrence Summers had dropped from the race to head the Federal Reserve promised to prolong the lifetime of super-easy money, hurting the US dollar while bonds and shares across Asia rallied.

HSBC downgraded Indian shares to "underweight" from "neutral" on Monday, citing the recent rally and downside risks to growth. The bank said that after the recent bounce, India looks relatively expensive and is most exposed to growth adjustments.

The government is due to release the August headline inflation data around noon, which will be the last key data point ahead of Friday's central bank policy review. Raghuram Rajan will have to confront what may well prove to be his biggest challenge in his short time in office as he announces his first monetary policy decision.