Mumbai: The rupee rose on Monday to its highest against the dollar in a week, despite a steep sell-off in global risk assets, on the back of dollar sales by corporates and exporters, as well as unwinding of long-dollar positions by banks.
The recovery comes after the rupee had hit a string of record lows against the dollar in the second half of May, with the latest on Thursday when it fell to as low as 56.52.
The rupee has been hit by a mix of global risk aversion at a time when India is facing steep economic and fiscal challenges.
However, some traders now say the currency may have hit a near-term bottom, despite remaining susceptible for more falls should external or domestic conditions worsen.
Traders say the Reserve Bank of India could intervene more aggressively, while perceptions the central bank could cut interest rates as early as this month may also contribute to a recovery in the rupee by helping boost a sagging economy.
"Participants are unwinding long dollar positions on expectations we have likely bottomed-out for now, though the external situation will be closely monitored for direction," said NS Venkatesh, treasurer at IDBI Bank.
Venkatesh said he expects the rupee to trade at 55.25-56.26 range for the week.
At 11:55 am (0625 GMT), the partially convertible rupee was at 55.46/47 per dollar compared to Friday's close of 55.54/55, after earlier hitting 55.26, its highest since May 25.
Traders said a mid-sized infrastructure company was spotted selling dollars for a third straight session. One trader said the company had $1 billion worth of inflows, of which $650 million had hit the market on Thursday and Friday.
A fall in global crude oil prices was also prompting oil firms, the largest buyers of dollars in the domestic currency market to stay on the sidelines for now.
"It's the start of the month, so demand from oil companies is less. Exporters also coming in to sell on hopes the government would push forth its reform agenda," Venkatesh added.
Given the rupee's vulnerabilities, traders say the RBI could take further steps to defend the currency, though they add the government would need to show more sustained fiscal policies for a more meaningful recovery.
The RBI has been spotted intervening last month in both forwards and spot markets.
Longer-term, analysts see more potential for rate cuts, with the 10-year benchmark bond yields hitting a 2-1/2 month low on Monday, as debt prices head for their third consecutive daily gains.
RBI deputy governor Subir Gokarn was quoted by media as indicating on Friday room to ease monetary policy because of slowing growth and easing oil prices.
The deputy governor followed up on those comments on Monday, seeing "elbow room" for the central bank to cut rates as oil prices have eased and because of core inflation, which has shown signs of moderating.
The one-month offshore non-deliverable forward contracts were quoted at 55.84 while the three-month was at 56.57, suggesting a weak near-term outlook.