The rupee gained on Monday, as domestic equities rose on hopes the government will push for more reforms soon and the Euro firmed up on hopes that Europe will unveil concrete steps towards activating a crucial Eurozone bail-out fund.
However, a warning by Moody's Investors Service indicate the rapid escalation of Eurozone sovereign and banking crisis threatening the credit standing of all European government bond ratings is expected to cap a sharp rise in the rupee.
At 11:26 a.m. (0556 GMT), the partially convertible rupee was at 51.98/99 per dollar, 0.5 percent stronger from Friday's close of 52.23/24.
Positive sentiment created by gains in local and Asian equities is helping the rupee. But nothing has changed fundamentally for the better in the domestic economy or the global one. So the rise could be short-lived, said Ashtosh Raina, Head of Foreign Exchange Trading at HDFC Bank.
India's benchmark share index was up nearly 2 percent, mirroring Asian peers. The rupee has slipped 16.83 percent from its strongest point in 2011 (which it reached in late July) and touched an all-time low of 52.73 last Tuesday, after which traders speculated the central bank sold dollars to shore-up the currency.
If the Moody's threat hits euro, then it (may) take the rupee with it, said a senior foreign exchange dealer with a private sector-bank. However, expectations the Reserve Bank of India (RBI) will act if the rupee slides sharply could limit losses, the dealer added.
Data released on Nov. 11 showed the RBI sold dollars in September after a nine-month hiatus. The RBI will intervene to smooth sharp movements in the rupee and prevent a downward spiral in its value but will balance this with the need to retain reserves in the event of prolonged turbulence, its Deputy Head said last week.
Dollar demand from local oil importers, the biggest purchasers of the greenback in the domestic forex market, needed to make monthly payments, could also weigh on the rupee, traders said.
The Euro surged on short covering on Monday, after an Italian newspaper said the International Monetary Fund (IMF) was preparing an aid package for Italy but doubts over the feasibility of the reported plan kept the outlook uncertain.
The one-month offshore non-deliverable forward contracts were quoted at 52.34, indicating a bearish short-term view on the onshore spot rate. The one-month onshore forward dollar premium was at 27.75 points from 26 on Friday, the three-month was at 62.5 points from 58 and the one-year premium was at 158.5 points, from 147.75.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange were all at 51.9600. The total volume was at $2.45 billion.