The rupee touched one-and-half-week highs early on Thursday, boosted by overnight losses in the dollar, but soon retreated tracking weak domestic shares, which added to worries of more foreign fund withdrawals.
At 10:50 a.m. (0520 GMT), the partially convertible rupee was at 45.11/12 per dollar, after hitting 45.04, its strongest since Jan. 4 and marginally above its close of 45.13/14 on Wednesday.
So far no significant action in the market but rupee seems to be under some pressure, as FII (foreign institutional investor) flows have thinned, said Hari Chandramgathan, a senior foreign exchange dealer with Federal Bank.
Rupee is, however, a bit stronger because of overall dollar weakness globally, the dollar index had dropped yesterday but there is no follow through selling seen. Oilers (oil importers) are there as usual. I expect a 45.00 to 45.20 range today.
Oil is India's biggest import and refiners are the largest buyers of dollars in the domestic currency market. Oil related dollar demand has risen due to high global oil prices.
Oil extended gains to hold below $92 a barrel on Thursday, buoyed by signs of higher demand after U.S. crude stockpiles fell more than expected and a cold snap swept through the U.S. Northeast, the region's largest heating oil market.
After falling overnight, the index of the dollar against six major currencies was up 0.14 percent at 80.147 points at 0520 GMT, which also helped pull the rupee off its highs.
The euro slipped from one-week highs on Thursday after short-covering triggered by Portugal's successful debt auction the previous day ran its course and traders looked to debt sales by Spain and Italy.
Traders would watch local shares for clues on the direction of foreign fund flows. Foreign funds are net sellers of nearly $500 million worth of shares so far in 2011, pushing the rupee down 0.8 percent.
In 2010, record inflows of $29.3 billion had helped the rupee rise 4.1 percent.
Indian shares skidded lower as software services bellwether InfosysTechnologies fell more than 4 percent after posting lower-than-expected quarterly earnings.
Traders will watch the food and fuel data due around 11:30 a.m. (0600 GMT) for clues on broader inflation and likely action at the central bank's policy review on Jan. 25.
A Reuters poll this week showed analysts saw the Indian rupee at 43.50 per dollar by the end of 2011, an appreciation of 3.6 percent from current levels.
We expect USD-INR to edge lower on strong Indian growth, monetary tightening and seasonal factors, Priyanka Chakravarty, a forex strategist at Standard Chartered Bank said in a note.
Hence, we maintain our short-term overweight FX rating on the INR and forecast USD-INR at 44.0 by end Q1-2011. That said, we acknowledge the significant risks to our view posed by inflation and euro-area risks, she added.
One-month offshore non-deliverable forward contracts were quoted at 45.37, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, MCX-SX and United Stock Exchange were all at 45.2150, with the total traded volume on the three exchanges at about $1.3 billion.