Rupee at 3-1/2 month closing high

An employee counts rupee notes at a cash counter inside a bank in Kolkata June 18, 2012.

MUMBAI (Reuters) - The rupee strengthened to its highest closing level in three-and-a-half months on Tuesday, helped by foreign inflows ahead of the government stake sale in state-run power producer NPTC, although weak domestic shares and demand for the greenback from oil importers limited gains.

The government is looking to raise about $2 billion through a stake sale this week in NTPC Ltd(NTPC.NS) as part of efforts to raise funds towards meeting its fiscal deficit target. Dealers expect foreign fund inflows between $300 million and $500 million for the transaction.

Other stake sales before the fiscal year ends in March include state trading company MMTC Ltd(MMTC.NS) and steelmaker Steel Authority of India Ltd(SAIL.NS).

Still, gains in the rupee in the near term could be constrained by caution ahead of the federal budget for 2013/14 this month. India needs to commit to its recent reform measures and meet its fiscal deficit targets, Fitch Ratings said on Monday.

"Foreign funds are bringing in dollars for investing in NTPC. We are seeing inflows on account of front running of the NTPC offer," said Anil Kumar Bhansali, vice-president at Mecklai Financials.

The partially convertible rupee closed at 53.135/145 per dollar, its strongest closing level since October 17, and versus its previous close of 53.285/295, after moving in a 53.07 to 53.42 range during the day.

The rupee's gains were constrained after domestic shares fell for a fifth session out of the past six, while dealers also cited dollar demand from oil importers.

In the coming days, adverse global sentiment and dollar demand in the domestic market could also weigh, said traders, keeping the rupee in a 52.80 to 53.50 per dollar range this week.

"The inflows would aid, but the rupee would also depend on the global sentiment," a senior trader with a foreign bank said.

In the offshore non-deliverable forwards, the one-month contract was at 53.49, while the three-month was at 54.06.

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 about 53.35 with a total traded volume of $5.25 billion.

(Editing by Anand Basu)