By ABHRAJIT GANGOPADHYAY And SUDEEP JAIN NEW DELHI -- The Indian rupee's recent surge isn't really a sign of--or even backed by--a strong economic recovery, a top government official cautioned Friday, giving weight to comments from analysts who have warned over the past few weeks that they see little evidence the currency can sustain its rise. "The Indian rupee is appreciating due to foreign capital inflows, and previous steps taken by the authorities are also helping," said the Finance Ministry official, who asked not to be named. The comments, from one of the country's most senior officials, come at a time when the rupee is at an 11-week high against the U.S. dollar, and traders appear to be bullish on the local currency. The dollar was trading at 49.39 rupees at 0921 GMT--its lowest level since Nov. 9, 2011. The greenback has lost nearly 9% from the record high of 54.2925 rupees reached on Dec. 15, 2011. Despite this, the Finance Ministry official's views are backed by analysts, who believe that the currency's rise shouldn't be taken to signal a revival of the Indian economy, and that traders should look through the euphoria and study the basics instead. Investment bank Brown Brothers Harriman said in a recent research note that it doesn't think that the "underlying fundamentals have shifted that much in 2012, so we remain skeptical that the INR [rupee] outperformance can continue." Watchers attribute the rupee's recent rise to a range of measures taken by the government and the Reserve Bank of India coupled with improved global risk appetite, and outright central bank intervention in the foreign exchange market. Foreign investors have already put a net $4.8 billion into local debt and stocks in 2012 so far--compared with $8.3 billion in the whole of 2011--following measures to ease foreign investment restrictions in capital markets. Also, the Reserve Bank of India has actively intervened in the currency markets to prop up the rupee, with its dollar sales rising to a 32-month high of $2.9 billion in November. Last month, the RBI placed limits on the unhedged currency positions that banks can hold overnight, and banned companies from cancelling and rebooking forwards contracts to clamp down on what it called speculative behavior. RBI Governor Duvvuri Subbarao Tuesday said the restrictions may not be temporary. That aside, there is much to be concerned about. India runs a persistent current account deficit due to a large trade gap, which is likely to increase given the weak global outlook for exports and the non-discretionary nature of India's major imports such as crude oil. India's July-September current account gap widened to $16.9 billion from $15.8 billion in the April-June quarter. Another concern is India's fiscal deficit, which is expected to overshoot the government's target of 4.6% of gross domestic product for the current fiscal year through March by as much as 1 percentage point. While government spending has remained high in the run-up to state elections in five states this year, tax revenue has taken a hit due to a slowing economy. In the July-September quarter, India's gross domestic product grew 6.9%--the lowest reading in more than two years. Investors are now watching how the central bank will respond to the rupee's recent rise. It may not intervene strongly at current levels, said Chin Loo Thio, a currency strategist at BNP Paribas. The bank has a stated policy of not revealing if it has intervened or not, and it says that it will step in only to curb volatility.

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