The Indian rupee inched up on Monday with a rally in local stocks boosting expectations of foreign inflows, though concerns about a political impasse and the fallout from a global credit squeeze weighed, dealers said.
The rupee ended at 41.01/02 per dollar, ticking up from Friday's finish of 41.0825/0925. It hit a nine-year high of 40.20 last month, but has since slipped on waning appetite for riskier emerging market assets.
"The general uncertainty at the moment has a lot of people waiting and watching from the sidelines," said the chief dealer with a private bank. Dealers said a volumes were unusually thin, and that a single sale of dollars by a large technology company ensured the rupee remained in positive territory.
Some dealers built positions in the local currency in anticipation of a renewed bout of overseas investments into local equities after the benchmark share index rose by nearly three percent. Still, markets remained vigilant for any fallout from woes in the US mortgage sector or a domestic political standoff that could unnerve foreign investors.
A stalemate between the government and its communist allies over a nuclear energy deal with the United States could result in fresh elections if it cannot be resolved. Overseas investment flows have been a key driver of the rupee, which has gained nearly 8 percent against the dollar this year to be Asia's best performing currency.
Foreigners have pulled about $2.3 billion from local equities this month, cutting their net purchases since end-2006 to less than $8 billion. J.P. Morgan expects the rupee to slip to 42 per dollar by end-2007.
"We expect the rupee to weaken over the next few months driven by a sharply lower BoP (balance of payments) surplus, reduced hedging by exporters, limited appetite for riskier assets and the uncertain political backdrop," it said in a note.