The rupee bounced back from its lowest in more than two and a half years to close marginally stronger on Friday, tracking a modest recovery in the euro. Corporates stepped up dollar sales to take advantage of the local unit's sharp decline.

Recovery

Recovery Time: Rupees

Negative local shares, which fell nearly 1 percent, and slower-than-expected industrial output growth kept the rupee from rising further, traders said. India's industrial output in September grew at 1.9 percent from a year earlier, its slowest pace in two years, sharply down from 3.6 percent a month earlier and below the median forecast for a 3.5 percent rise in a Reuters poll.

The partially convertible rupee closed at 50.1150/1250, 0.1 percent stronger than its Wednesday close. Earlier in the day, it had dropped to 50.4200 against the dollar, a level last seen on April 28, 2009.

There was heavy dollar selling by corporates and nationalized banks from around 50.40 levels and some risk-on globally also aided the rupee. We also saw high inflows after a holiday yesterday, said Pramod Patil, senior foreign exchange dealer at State Bank of Mauritius.

The euro rose versus the dollar on Friday, moving away from a one-month low, before a vote by Italy's Senate that is expected to approve austerity measures, but the precarious situation in the euro zone left the currency vulnerable to renewed selling.

The rupee lost 2 percent in the holiday-shortened week - its biggest weekly fall in seven weeks and is down about 10.8 percent so far this year - making it the worst performing currency.

Risk aversion globally resulting in lack of capital inflows into emerging markets like India coupled with current account deficit will keep rupee under pressure in the near term, said Mohan Shenoi, head of treasury at Kotak Mahindra Bank in Mumbai. He expects rupee to weaken to 51.30 per dollar in the near term.

Analysts polled by Reuters were bearish on the rupee's outlook. The Indian currency may re-test a record low of 52.20 per dollar on a widening trade deficit, falling car sales and a Moody's outlook downgrade of the country's banking sector.

Trade deficit in October is seen at $19.6 billion, the highest in four years, the country's trade secretary said on Tuesday, citing provisional data. At this rate, the trade deficit for the year could breach $150 billion, Rahul Khullar said.

A finance ministry official told Reuters that a decision on increasing foreign institutional investor limits in government debt will take some more time, further weighing on the unit.

The one-month onshore forward premium was at 27 points from 25.25 points on Wednesday, the three-month was at 66.50 points from 65.25 and the one-year was at 163.50 points from 167.75.

One-month offshore non-deliverable forward contracts were quoted at 50.11, at par with the onshore spot rate.

In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, the United Stock Exchange and the MCX-SX were at 50.28. The total volume was at $4.8 billion.