A drop in import demand and rush of foreign fund inflows to a stock market, which has added 17 per cent to the benchmmark Bombay index since the budget a little over two weeks ago, has kept the market tilted in favour of dollar supplies in the near term.

Most corporates remain rupee bears in the medium term, but only a policy statement or drastic turn for the worse in the external sector could trigger a fall as the Reserve Bank of India (RBI) has a tight grip on a currency not convertible on the capital account, dealers said.

"The RBI's silence has most corporates perplexed. They'll wait for other policy announcements before deciding on a course of action," said Ravi Menon, a foreign exchange consultant.

The Government's annual Export-Import Policy and the RBI's credit policy statements, both due next month,could uncage the bears, albeit with the central bank acting as ringmaster.

If the RBI cuts interest rates or adds further liquidity to money markets through a reduction in banks' cash reserve ratio bearish sentiment toward the rupee will be stirred again.

The rupee slipped to 42.41 per dollar on Wednesday after firming to 42.395 on Tuesday, twelve paise (0.12 Rupees) stronger than its levels two weeks back.

"An immediate threat of the rupee weakening has faded. Besides, the customary month-end oil company demand (for dollars) may not be seen," said a foreign bank's Chief dealer.

With both the Japanese yen and Korean won strengthening in regional markets, the RBI might worry less about the rupee also gaining ground against the dollar, some dealers said.

State-run oil firms made the biggest dent in dollar demand this month, deferring large monthly import payments in order to buy out a slice of the government's stake in other oil companies.

Oil companies are establishing cross-holdings to dilute theGovernment's share and help reduce its rising fiscal deficit.

Dollar inflows have also been coming in through foreign funds buying around $100 million in a post budget spending splurge.

The government's Economic Survey last month ignited speculation moves were afoot to let the rupee weaken with its comment that the currency should ensure export competitiveness.

When the RBI cut interest rates on March 1, soon after the annual budget, that view was reinforced, but short term circumstances kept the bears away.The rupee has stuck to a narrow range around 42.50 since it recovered from its all-time low of 43.70 on August 20 after the central bank imposed curbs on speculation.

"There has to be a rollback of the measures... spot market liquidity has been drastically reduced. Daily volumes have dipped to barely $100-$200 million, against the $2 billion seen earlier," said PH Ramaswamy, Head of Treasury at Credit Lyonnais.

Dollar demand from importers remains thin and those that took long dollar positionshave liquidated them, dealers said. Importers demand for dollars could turn normal as the Financial year closes on March 31. End-March may also see dollar demand as Reliance Industries redeems most of a $140 million convertible overseas bond issue, which falls due for conversion, dealers said.