MUMBAI: The Indian rupee rose to its strongest level in two-and-a-half months on Friday after the government raised diesel prices to lower its subsidy burden and after the Federal Reserve announced new aggressive monetary stimulus.
The diesel price hike, though inflationary, has raised the prospect of rate cuts from the Reserve Bank of India, perhaps as early as its next policy review on Monday, given the central bank has repeatedly pressed the government to shore up its finances.
Any rate cuts could help boost foreign inflows into stocks and further shore up confidence in the Indian economy at a time when the dollar is under pressure after the Fed's liquidity measures.
However, much will depend on inflation data due later in the day. Analysts expect the wholesale price index to have risen 6.95 percent in August.
"Great timing of both the events coinciding. Thus, INR showed major appreciation. So it's a dual impact," said Paresh Nayar, head of fixed income and forex at First Rand Bank.
"I am not too sure about a Monday rate cut, I expect that only in the next policy," he added, referring to the RBI's October meeting.
Nayar said he saw good support for USD/INR at 54.55 and resistance at around 54.85.
The partially convertible rupee was trading at 54.67/68 per dollar as of 0435 GMT, 1.4 percent above its close of 55.43/44 on Thursday. The unit rose as high as 54.64 earlier in the session, its strongest since July 4.
The gains if sustained would be the rupee's biggest single-day percentage gain in two months.
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