By Khushita Vasant At 1200 GMT Latest Change USD/INR 56.11 +0.15 8.15% 2022 Bond 8.07% Unch 8.79% 2021 Bond 8.23% +1BPs Call Rate 8.0-% -3BPs Forward Dollar Premium/Discount* June 3.055 +0.025 *Forward Dollar Premium/Discount are midpoints of bid-offer spreads MUMBAI--The Indian rupee fell to its lowest level in nearly four weeks against the U.S. dollar Tuesday, tracing weakness in the euro which saw a near two-year low against the greenback. The dollar was at 56.11 rupees late Tuesday, a level not seen since June 28 when it was at 56.80. On Monday, the greenback was at 55.96 rupees in late Asian trade. The currency breached the psychologically key level of 56.00, with mild gains in local stocks lending little or no support -- the Bombay Stock Exchange's benchmark Sensex finished 0.2% up. The euro floundered after business activity data flagged the growing risk of recession in the currency bloc, while worries about the debt troubles in Greece and Spain played in the background. The rupee continues to be also plagued by slower growth and inertia in the political reform process. "Lack of enabling policies for improving the country's infrastructure has made the economy to pay heavily with growth slowed down to its worst levels," a note by India Forex Advisors said. While the government is expected to speed up decisions on foreign direct investment in various sectors, developments in the euro area will continue to influence the local currency in the immediate future. The house expects the dollar to test 56.50 rupees this week. In the debt market, government bonds finished lower in the absence of any major trading triggers. Trading volumes were relatively lower ahead of a bond sale worth 150 billion rupees on Friday. The benchmark 8.15% 2022 ended at 100.52 rupees, compared with its previous close of 100.55 rupees. The old benchmark 8.79% 2021 bond finished at 103.54 rupees, compared with 103.62 rupees Monday. The market now looks forward to the Reserve Bank of India's rate-setting meeting on July 31. Recent data, which showed inflation softened, have led to hopes of an interest rate cut. But, according to a note by BNP Paribas, "the policy space for the RBI to cut interest rates in the near term remains cramped," particularly after Governor Duvvuri Subbarao cautioned last week that price pressures remain way above the threshold level. "The potential for rate cuts going forward remains intact, with faltering growth rate in India and abroad," the house said. However, at this juncture, monetary policy makers are in a dilemma. "While broadly it is a soft/easing rate regime, inflation and inflationary expectations [and a] below-par monsoon are posing hurdles," BNP Paribas said. "To add to that, we are yet to see concrete steps toward fiscal consolidation by the government." Write to Khushita Vasant at khushita.vasant@dowjones.com

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