Rupee gains on global risk-on; domestic outlook uncertain

A Kashmiri shopkeeper staples together rupee notes to make a garland at a market in Srinagar September 3, 2012.

MUMBAI (Reuters) - The rupee rose on Tuesday, snapping a two-session losing streak as demand for global risk assets was bolstered by better-than-expected U.S. and German economic indicators, and talk Spain may soon ask for a bailout.

However, domestic factors capped broader gains, given concerns about whether the Reserve Bank of India will cut interest rates on October 30, thus potentially bolstering growth while increasing foreign investor inflows into Indian assets.

Whether the RBI will respond to the government's fiscal and economic measures remains uncertain. Deputy governor H.R. Khan said on Tuesday monetary policy and fiscal policy must work in tandem, slightly raising expectations for rate cuts.

"Any rate cut will give the rupee a boost. The RBI should focus more on growth, which is a bigger imperative than inflation," said Moses Harding, head of asset-liability management at IndusInd Bank.

The partially convertible rupee closed at 52.87/88 per dollar, stronger than its previous close of 53.015/0250, as per the State Bank of India closing rate.

The rupee tracked higher Asian currencies following the stronger-than-expected U.S. retail sales data.

A German ZEW survey showing analyst and investor sentiment improved, and hopes Spain would soon request a bailout, underpinned sentiment for the local currency later in the session.

However, on top of caution ahead of the RBI, broader gains were capped by profit-taking in local stocks and dollar demand from importers.

In the offshore non-deliverable forwards market, the one-month contract was at 53.04 and the three-month at 53.53.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 52.98 with a total traded volume of around $4.5 billion.

(Editing by Rafael Nam)