Rupee weakens on Fed taper fears, but domestic data soothes

By Subhadip Sircar

MUMBAI (Reuters) - The rupee fell on Tuesday as the dollar gained after strong U.S. economic data sparked expectations of an early tapering of the Federal Reserve stimulus, but a sharp easing in the current account deficit capped wider losses.

Data late on Monday showed India's current account deficit narrowed to 1.2 percent of gross domestic product, the lowest since the June quarter of 2009.

The deficit data was the latest in a run of positive signs for the sluggish domestic economy and could put India in a better position should the Fed start tapering, than in the summer when the rupee hit a record low.

The improved data also comes as the Reserve Bank of India (RBI) has removed critical support to the currency, allowing the entire dollar demand from state-run oil refiners to be sourced from markets and not a special foreign exchange window.

"The current account deficit data is positive. I don't think the rupee will depreciate further from here unless there is strong data out of the U.S.," said Pramod Patil, assistant vice president, forex and money markets, United Overseas Bank in Mumbai.

The partially convertible rupee closed at 62.36/37 per dollar compared with 62.315/325 on Monday.

The weaker rupee tracked Asian currencies that also fell, under pressure after the U.S. Institute of Supply Management's index of national factory activity rose in November to its highest since April 2011, with the pace of hiring also accelerating.

The rupee's losses were also capped by what dealers cited as purchases of the local currency tied to foreign demand for state-run Power Grid Corp of India's $1.2 billion share sale, which opened on Tuesday.

In the offshore non-deliverable forwards, the one-month contract was at 62.82, while the three-month was at 63.77.

(Editing by Prateek Chatterjee)