By Aditya Phatak
NEW DELHI (Reuters) - The rupee rebounded on Tuesday to post its biggest single-session rise in two months powered by dollar inflows towards some foreign banks and strong local shares, even though doubts about the sustainability of the rally remain.
Improved appetite for risk among investors after the U.S. Federal Reserve Chairman Ben Bernanke underlined the need to keep an ultra loose monetary policy sent the dollar reeling and added to the buying spree on the rupee, traders said.
The rupee added 1.04 percent to end at 50.7350/7450 to the dollar, compared with Monday's close of 51.265/275, its sharpest climb in a single session since January 27, Thomson Reuters data showed.
"Things look good for the rupee at the moment," said Ashtosh Raina, head of foreign exchange trading at HDFC bank.
"The next support for the dollar is around 50.55 and the broad range for the rupee is 50.00 to 51.00."
The BSE Sensex rose 1.2 percent on media reports the government would not target the so-called participatory notes or P-Notes in a blanket manner under its newly proposed rules targeting tax avoidance.
P-notes are derivative products that allow foreign investors to invest anonymously into Indian equities.
Some traders, however, remain skeptical about the sustainability of rupee's rise.
"All the markets are just too volatile to take a call in favour or against a currency. Worries over the global economy too have not really subsided," said a currency trader with a private-sector bank.
China has already lowered its growth forecast for the year to 7.5 percent and euro zone's debt crisis seems too far away from being resolved.
A few dealers also saw the dovish comments from the U.S. Fed as a problem for the rupee as the remarks could fuel a rally in commodities, especially oil prices, pushing the demand for dollars from local oil importers even higher.
India imports about 80 percent of the oil that it consumes and refiners are the biggest buyers of dollars in the currency market.
Dollar demand from oil importers has picked up in the past few weeks due to fears that tensions between Iran and the U.S. could result in sanctions on Tehran's customers, making it difficult for New Delhi, which buys 12 percent of its oil needs from Iran, to receive supply and make payments.
International Energy Agency's executive director, however, told Reuters that New Delhi could be exempted from tighter U.S. sanctions.
Brent held steady above $125 due to increased appetite for riskier assets from investors and supply concerns amid tightening Western sanctions on Iran over the Islamic Republic's disputed nuclear program.
The one-month offshore non-deliverable forward contracts were at 51.28.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange ended at 51.28, on the MCX-SX at 50.7375 and on the United Stock Exchange at 50.74, on a total volume of $6.9 billion.
