Re ends strong on stock market rise

The rupee reversed early losses and crept higher on Tuesday as a strong rise in local stocks raised hopes that foreign capital inflows will hold up in coming months despite global credit market problems.

Investors also bought the rupee on expectations the US Federal Reserve would cut its federal funds rate by at least 25 basis points later in the day.

The partially convertible rupee ended at 40.48/49 per dollar, up nearly half a percent from the day's low of 40.65 and above 40.56/57 at Monday's close.

"Indian shares closed much stronger than their Asian counterparts, and that took the dollar bulls by surprise," said V. Rajagopal, head of FX trading at Kotak Mahindra Bank.

"There was a good chunk of inflows above the 40.55 per dollar mark," he said.

Indian shares rose 1.06 per cent on Tuesday to their highest close since late July, while most markets elsewhere in Asia fell on fears credit market problems were spreading.

Foreign funds have bought about $1.1 billion of Indian stocks so far this month after selling about $1.9 billion last month, taking their net investment to nearly $9.5 billion in 2007.

A U.S. rate cut would widen India's 250 basis point rate premium. The could attract more foreign interest in the rupee, which hit a nine-year high of 40.20 in July and has risen more against the dollar than any other Asian currency this year.

Some analysts expect the rupee to open around the 40.40 per dollar on Wednesday if the Fed cuts rates by 25 basis points, but likely central bank intervention may check steep gains.

The Reserve Bank bought more than $38 billion in the first seven months of 2007 trying to rein in the rupee's rapid rise.