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MUMBAI (Reuters) - The rupee pared early losses to close slightly stronger against the dollar on Thursday, in the last trading session of the fiscal year, tracking a recovery in domestic shares and dollar sales by exporters.
Despite negative developments this month, including the withdrawal of a key ally from the ruling coalition and the cautious tone of the Reserve Bank of India on monetary policy, the rupee was down by a marginal 1.3 percent in the January-March quarter.
The currency was supported by continued strong foreign inflows and expectations the current account deficit would improve in the March quarter and beyond. Data late on Monday showed the current account deficit touched a record 6.7 percent of GDP in October-December.
However, the currency remains at risk from developments in the euro zone and concerns in the build-up to the elections about the outcome of the polls likely in May 2014.
"We expect the dollar/rupee at 55.50-56 and upwards in the third quarter of 2013 as investors may become circumspect in the build-up to elections whether there will be a stable government or not," said Shivam Chakravarty, an economist at HDFC Bank.
The partially convertible rupee closed at 54.28/29 per dollar versus 54.365/375 on Tuesday, after moving in a narrow 54.27 to 54.48 band.
The rupee has weakened 6.3 percent in the current fiscal year that started in April 2012.
A supportive factor has been the strong foreign fund inflows of about $12.70 billion in Indian shares and debt so far in 2013. In 2012, foreign funds had invested around $31 billion.
The rupee recovered from a weaker open on Thursday as exporters sold the greenback, a typical occurrence towards the end of each month. Markets will be closed on Friday and Monday because of holidays.
"Nobody wanted to initiate new positions on the last day of the fiscal. The volume is far less, and the regular players are all staying away," said Hemal Doshi, chief currency strategist at Geojit Comtrade.
The currency also benefited after Indian shares rose for a second consecutive session on Thursday, although dollar demand from oil importers prevented a sharper rise in the rupee.
In the offshore non-deliverable forwards, the one-month contract was at 54.71 while the three-month was at 55.33.
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 closed at around 54.65 with a total traded volume of $3.6 billion.
Editing by Anupama Dwivedi