The Indian rupee rallied more than 1 percent on Monday on hopes for government measures to halt a slump in the currency, which hit a record low on Friday, with traders saying action to boost long-term foreign investment would be the most effective step.
Finance Minister Pranab Mukherjee said at the weekend that the government would unveil measures on Monday. The fall in the rupee has mirrored a decline in economic growth to a nine-year low.
India may introduce bonds for non-resident Indians with an interest rate of 7-9 percent, a source said.
Traders said measures could also include changes to foreign bond investment limits to attract more inflows into government and corporate securities.
Another possibility is allowing oil importers to buy their dollars directly from the Reserve Bank of India (RBI) rather than via the foreign exchange market.
However, analysts said these sorts of measures would provide only stop-gap relief and that India needed to improve its economic fundamentals, including addressing its current account deficit, to bolster the rupee.
"The problem with the rupee is fundamental, and technical measures cannot be supportive over a longer period of time," said Sanjay Mathur, an economist with Royal Bank of Scotland in Singapore.
"But it is also important to note that all the India-centric factors for the fall in the rupee, like lack of reforms, has been priced in. Further weakness will be because of the global risk-averse sentiment," he said.
At 9:40 a.m., the partially convertible rupee was at 56.48/51 per dollar, up sharply from its Friday close of 57.12/13.
On Friday, the rupee fell to a record low of 57.32, down more than 18 percent since the start of the year.
Traders said RBI could target bringing in short-term inflows to stabilise the rupee by tapping the pool of offshore funds held by non-resident Indians.
RBI has discussed with state-run oil firms steering 50 percent of their dollar purchases via a single state-owned bank to smooth volatility in the rupee, though no decision has been made, two oil executives said on Friday.
Dollar purchases from oil companies account for around $10-$12 billion of dollar demand in domestic currency markets each month, according to HSBC.
Another action might be to provide a special central bank window to sell dollars directly to oil companies, traders said.
India needs to shore up its credibility among investors, both in sticking to its projected fiscal deficit of 5.1 percent for the fiscal year ending in March 2013 and to narrow its current account deficit, analysts said.
Standard & Poor's and Fitch Ratings have cut their outlook on India's sovereign ratings to negative, threatening its investment-grade status, citing slowing policy reforms.
Moody's Investors Service on Monday though said it was maintaining a stable outlook for India's Baa3 rating. It said slowing growth and higher levels of inflation were already factored into the outlook.
In a shot in the arm for the economy, Sweden's IKEA, the world's largest furniture retailer, said on Friday it would invest 1.5 billion euros to open 25 stores in India.