MUMBAI The rupee weakened on Tuesday, hurt by dollar demand from oil firms and companies, but demand for the local currency from custodian banks prevented a sharper slide.
However, onshore forward premiums rose after the Reserve Bank of India (RBI) said it would start a special window to provide exporters dollar credit.
The rupee has gained 0.7 percent so far this year despite concerns about India's current account and fiscal deficits, on expectations for interest rate cuts and continued economic reforms from the government.
Foreign investors have remained buyers of Indian equities, spurring Macquarie and Westpac this week to become the latest foreign banks to recommend shorting the USD/INR pair on expectations of further gains in the rupee.
"We acknowledge India's lingering longer term risks from the twin fiscal and current account deficit," Macquarie said in a note on Tuesday.
"But for the short term, we are of the view that the rupee could benefit from the reform measures and a strong demand for EM equities, even as direct investment inflows begin to rebound," it added, referring to emerging markets.
The partially convertible rupee closed at 54.6150/6250 per dollar versus its previous close of 54.4950/5050.
Oil firms, the biggest buyers of dollars in the domestic currency market, were seen purchasing the greenback through the day, dealers said.
Gains in domestic shares, however, helped sentiment for the rupee while dollar sales by custodian banks also aided.
However, the three-month onshore forward premium rose to 98 points from 94.75 at previous close, the six-month was at 183.75 from 177.50 on Monday while the one-year climbed to 333.50 points from 323.25 previously.
Analysts said the RBI's decision on Monday to open a special window to provide exporters with dollar credit could have been done in anticipation of dollar shortages, especially starting in late February when the United States is expected to hit its debt ceiling limit.
In the offshore non-deliverable forwards, the one-month contract was at 54.90 while the three-month was at 55.45.
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 were all around 54.71 with a total traded volume of $4.97 billion rupees.
(Editing by Anand Basu)