The Indian rupee hit a nine-year high of 39.85 per dollar on Thursday, taking its gains for the year to 11 percent, stoking expectations of central bank action to curb it and fuelling government concern about exports.
Traders said lower US interest rates brightened the outlook for higher yielding assets such as the rupee, and the currency was also underpinned by expectations of capital inflows into the record-breaking stock market as well as longer-term investments. "It's just the inflows and they continue to be robust.
The near term picture seems extremely bullish and I expect the rupee to hit 39.50 by next week," said V. Rajagopal, head of FX trading at Kotak Mahindra Bank. "The dollar is taking a beating in global markets and that should also whet appetite for the rupee," he said.
Tuesday's 50 basis point cut in US interest rates widened India's rate premium to 300 basis points - its highest in three years and another attraction for foreign investors.
Trade Minister Kamal Nath said the rupee, which has risen more against the dollar than any other Asian currency this year, was a concern and the government would look to protect exporters. "It is a new situation and it needs a new response," Nath told reporters in New Delhi. A J.P. Morgan Chase six-currency real effective exchange rate index puts the rupee at 15.8 percent overvalued, against 13.9 percent a month ago and just 5.5 percent a year ago.
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