MUMBAI (Reuters) - The rupee posted its biggest daily gain in nine months on Friday, fuelled by a robust rally in local stocks, with the government's move to raise gas prices for the first time in three years also aiding sentiment.
The Sensex rose nearly 3 percent on Friday, marking their biggest single day gain in 1-1/2 years, as energy firms rallied after the government approved a hefty increase in gas prices.
The gas price hike raised expectations that the government would also announce other potentially unpopular moves, such as opening up more sectors to foreign investment.
The sharp recovery in the rupee from a record low of 60.76 hit on Wednesday was also helped by talk of corporate inflows related to Diageo Plc's (DGE.L) stake purchase in United Spirits Ltd (UNSP.NS), as well as selling by exporters.
Still, the rupee lost 4.9 percent in June after foreign investors sold a net $7 billion in bonds and shares for the month, and ended down 8.6 percent in April-June, its biggest quarterly fall in nearly two years.
Fears of an early end to the U.S. Federal Reserve's monetary stimulus hit emerging markets in June, but India in particular, where markets have been caught in a negative feedback loop in which the falling rupee sparked across-the-board foreign selling, with the outflows in turn further denting the currency.
Analysts say the rupee could see some consolidation in the near term, especially as the government gears up to announce more fiscal and economic reforms, but will remain constrained if foreign investors continue to sell.
"The rupee is seeing a recovery as it had overshot 60 because of panic in the market. It may remain supported for the next few sessions on inflows, but there is more downside left for the currency," said Param Sarma, chief executive at NSP Forex.
Attracting foreign flows is critical for India after its current account deficit hit a record high 4.8 percent of gross domestic product in the fiscal year ended in March.
Investors have welcomed a global risk rally sparked by reassuring comments from several Fed officials that any tightening of its stimulus drive was still a distant prospect.
The rupee closed with gains of 1.4 percent at 59.385/395, compared with its previous close of 60.19/69.20. It rose to a session high of 59.2050.
The rupee's recovery boosted government bonds, leading the fixed income association to widen trading bands for the day, in contrast to recent weeks when the same action was taken to counter a sharp fall in the debt market.
In the offshore non-deliverable forwards, the one-month contract was at 59.79, while the three-month was at 60.45.
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 around 59.745 with a total traded volume of $5.9 billion.
Editing by Prateek Chatterjee