The rupee flip-flopped in early trade on Monday as the positive sentiment following the Reserve Bank's surprise rate hike was offset by a choppy session in local shares and the dollar's gains versus major currencies.
The Reserve Bank of India raised interest rates almost a month earlier than expected on Friday, and analysts said it would likely follow up the quarter-point hike with another move on July 27, when it reviews its monetary policy, given concerns about inflation hovering above 10 per cent.
At 10:23 a.m. (0453 GMT), the partially convertible rupee was at 46.78/79 per dollar, slightly weaker than its 46.77/78 close last Friday. It has traded in a range of 46.71 to 46.83 so far in the session.
"Rupee is a tad weaker as stocks are likely to take the rate-hike-related beating. Even the (fiscal) first-quarter results may not be great, so some amount of position squaring should naturally see stocks in red and rupee weaker," said R.K. Gurumurthy, head of treasury at ING Vysya Bank.
The BSE Sensex turned negative after opening higher on Monday, led by losses in banking stocks after the central bank raised interest rates earlier than expected.
Foreign fund moves into and out of the stock market have a large influence on the rupee's fortunes. So far this year, foreigners have bought a net $6.8 billion, in addition to last year's record $17.5 billion inflow.
Dealers said volumes may be slightly lower than average due to the nationwide strike called by India's main Hindu nationalist opposition Bharatiya Janata Party (BJP) and leftist parties.
The strike, to protest against the hike in fuel prices effected last month, is seen as a test of opposition strength as the ruling Congress party attempts to push ahead with key reforms in Asia's third largest economy.
Finance minister on Sunday ruled out a roll back of the fuel price hike move.
"Due to the strike liquidity may be less, reducing the upside for the rupee," the head of desk for trading in non-deliverable forwards at a foreign bank said, adding that overall, there was interest in buying the dollar-rupee at lower levels.
Dealers said they would continue to watch the dollar's moves versus majors for direction during the day. The dollar index against six major currencies was up 0.1 per cent.
The dollar held at its lowest in nearly two months on Monday and the euro paused after last week's boost from unwinding of short and leveraged positions, with traders and analysts seeing scope for it to squeeze a bit higher.
One-month offshore non-deliverable forward contracts were quoted at 46.98, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX were both at 46.9250, with the total traded volume on the two exchanges at about $820 million.
