The RBI's measures to address exchange rate volatility by curbing liquidity paid off with the rupee today firming up 58 paise to end at 59.31 against the dollar, the biggest gain in more than a fortnight.
The rupee opened higher at 59.20 per dollar as against the previous close of 59.89 at the Interbank Foreign Exchange Market and firmed up to a high of 59.14 before ending at 59.31 per dollar, a net gain of 58 paise, or 0.97%. It moved in a range of 59.14 to 59.50 per dollar during the day.
On June 28, rupee had appreciated by 80 paise.
The Reserve Bank last night raised borrowing costs for banks and said it would sell bonds through open market operations to drain Rs 12,000 crore from the system.
The steps were aimed at restoring stability to the foreign exchange market, the central bank said. The rupee had touched an all-time low of 61.21 on July 8.
"For the rupee, this may provide some short-term relief as it shows policy makers' resolve to limit further sharp weakness in the currency," Dominic Bunning, FX strategist, and Paul Mackel, head of Asian Currency Research at HSBC, said in a report.
"However, the current account deficit and the ability to attract long-term foreign capital inflows are still major hurdles, as is external market volatility."
Finance minister P Chidambaram on Tuesday said on Monday's measures by the RBI have nothing to do with the upcoming monetary policy review and may not impact interest rates of banks.
The RBI's measures, he said, were aimed at checking excessive volatility and speculation in the forex market.
Last week, the RBI had asked oil companies to source all of their monthly needs of 8-8.5 billion dollars for import of oil from a single public sector bank. It also barred banks from trading in currency futures and exchange-traded currency options market on their own.
The rupee is expected to appreciate in coming days to 58 levels, said Pramit Brahmbhatt, CEO of Alpari Financial Services (India).
Meanwhile, the premium for forward dollars firmed up sharply on sustained paying pressure from banks and corporates.
The benchmark six-month forward dollar premium payable in December finished higher at 205-215 paise from 174-1/2-176-1/2 on Monday. Far-forward contracts maturing in June jumped to 410-420 paise from 363-365 paise previously.
The RBI fixed the reference rate for the dollar at 59.3925 and for the euro at 77.7250.
The rupee turned positive against the pound sterling to end at 89.52 from the previous close of 90.13 and also firmed up against the euro to 77.82 from 77.98.
It rose against the Japanese yen to 59.67 per 100 yen from 59.83.