The rupee ended at its strongest close in nine years on Wednesday, boosted by foreign buying of stocks, but gains were capped as the central bank and oil companies bought dollars, dealers said. The partially convertible rupee ended at 40.450/455 per dollar, its strongest finish since May 1998, up from Tuesday's 40.5500/5675.
"With equities looking strong, the 39.80 target is in sight, the only question in the market's mind is: 'when'," said a dealer with a private bank. The rupee weakened past 39.80 in May 1998, when India conducted a number of underground tests of nuclear devices, and had sanctions imposed on it by a number of countries in response.
The benchmark stock index ended at a record closing high on Wednesday. Foreign funds have poured $5.7 billion into Indian equities in 2007 after investing about $8 billion in 2006.
The rupee has gained more than 9 percent this year, propelled by strong foreign investment flows which have helped make it the best performing Asian currency in 2007. The rupee has been mostly in a 40.50-41.25 range since early May, with traders saying the central bank has bought dollars as it neared 40.50. The rupee hit a nine-year high of 40.28 on May 28.