The currency traded near the highest in 9 1/2-years after the Reserve Bank of India kept its overnight lending rate at 7.75% and instead raised the amount of cash that banks must set aside.
The Federal Reserve starts a two-day meeting today to decide on interest rates. Investment from overseas in Indian equities increased following the September 18 decision by the US central bank to reduce borrowing costs.
Traders are now watching what the Fed is likely to do, said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. The gap in interest rates seems to be increasing sentiment in favor of the rupee.
The currency rose 0.1% to 39.39 against the dollar at the 5 pm close of trading in Mumbai, according to data compiled by Bloomberg. It rose as high as 39.27 on October 11, the strongest since February 1998, and has gained 12.5% this year.
The central bank also held the rate at which it drains money from the banking system, or the reverse-repurchase rate, at 6%.
The rupee is headed for its biggest annual gain since at least 1974 and is the best performer in Asia in 2007, as buying by global funds pushed the benchmark stock index above 20,000 for the first time yesterday.
The Reserve Bank bought a record $40 billion of dollars in the eight months through
August to slow the appreciation.
Global funds bought a record $17.1 billion of shares more than they sold this year, according to the Sebi.
Economic growth of 9.4% in the year ended March 31 prompted Standard & Poors to raise the countrys debt rating to investment grade for the first time in 14 years.
The bonds fell the most in more than a month after the central bank unexpectedly told lenders to set aside more reserves for the fourth time this year. The yield on the benchmark 10-year bond rose to the highest in more than a week after the Reserve Bank of India ordered banks to keep 7.5% of deposits in cash, from 7%, starting November 10 to prevent surplus funds from quickening inflation.