India's rupee rebounded against the dollar on Tuesday after the central bank hiked short-term interest rates to shore up the beleaguered currency and reduce speculation.
The Reserve Bank of India (RBI) increased rates as the currency comes under pressure from a uncertainty in the country's economy as well as a flight of foreign capital.
The unit firmed to 59.37 rupees against the greenback from Monday's close of 59.85 rupees.
The bank's steps were "intended to quell excessive speculation, reduce volatility in foreign exchange markets and stabilise the rupee", Finance Minister P. Chidambaram said in televised remarks.
"The rupee will appreciate further from here," Param Sarma, chief executive of NSP Forex, forecast on Tuesday, predicting the rupee would hit 58.50 by next week.
But the stock market fell 1.20 percent as the bank's moves dashed investor hopes of cheaper borrowing to spur India's slow-growing economy.
India has joined Brazil, Indonesia and other emerging economies in tightening monetary policy to boost their currencies amid expectations the US will soon reel in its vast stimulus programme.
The US Federal Reserve's money-printing stimulus scheme has helped fuel huge flows of cash into emerging markets as traders seek out better returns on their investments. With that money expected to dry up, however, Western dealers are withdrawing from those economies.
The RBI hiked two short-term interest rates by a two percentage points to 10.25 percent, including one rate used to meet banks' emergency funding needs.
The rupee has been the worst performing major Asian currency this financial year, dropping to a record low of 61.21 rupees to the dollar last week.
Abhishek Goenka, chief executive of consultancy firm IndiaForex, called the RBI move "positive for the rupee in the short-term".
The bank's action is aimed at making it more attractive for investors to hold rupees but disappointed business, which has been clamouring for lower rates to boost economic activity.
Chidambaram reaffirmed he expected growth this year to be at least six percent, after the economy expanded by a decade low of five percent last year.
"It seems we are doing pretty well" compared to sluggish global growth, he added.
The Asian Development Bank on Tuesday lowered its growth forecast for India this year to 5.8 percent, from 6.0 percent.
The latest measures came after talks between Prime Minister Manmohan Singh and monetary authorities.
Besides global factors, the rupee has been dragged down by a record current account deficit, the broadest measure of trade.
The deficit stems mainly from huge oil and gold imports and weak exports.
Analysts said bond yields also rose, which may encourage inflows into the country.
