MUMBAI: The Indian rupee strengthened on Friday aided by local share gains on improved global risk appetite, but analysts expect the upside to be limited in the medium term as the pace of foreign fund inflows is seen slackening.
Traders said the Reserve Bank of India's unexpected 75 basis points cut to 4.75 percent in cash reserve ratio, effective Saturday, less than a week before its mid-quarter policy review on March 15, was unlikely to have a big impact on the rupee.
However, it is seen aiding the local shares, which in turn could help support the rupee.
"There will be some positive impact on the rupee thanks to stock gains, but a lot will depend on how the US non-farm payroll comes out," a trader with a foreign bank said.
The US economy likely recorded a third month of solid job gains in February, which could further reduce the chances of additional monetary stimulus from the US Federal Reserve.
The rupee closed at 49.84/85 to the dollar, stronger than its Wednesday's close of 50.28/29. The market was closed on Thursday for a local holiday.
The currency posted its second straight week of losses, having shed 0.7 percent on the week.
Global risk appetite improved on Friday as Greece successfully closed a bond swap needed to avert a messy default.
Some dollar demand from oil importers limited the rupee's gain, traders said.
Oil is India's largest import item and refiners are the biggest buyers of dollars in the local forex market. Brent crude held above $125 a barrel, heading for its sixth weekly gain in seven.
Analysts and economists remained cautious on the rupee in the medium term.
"The recent appreciation of the rupee has run its course. We do not expect the recent pace of capital flows to be sustained," Indranil Pan, chief economist at Kotak Mahindra Bank wrote in a recent note.
He expects the rupee to stabilise in the near-term, averaging 50.50 in the January-March quarter.
The one-month offshore non-deliverable forward contracts were at 50.30.
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 all ended at around 50.1, on a total volume of $3.90 billion.
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