The currency gained for the second straight month on the back of dollar supply from exporters and foreign investors. Rupee ended at 53.80 on Tuesday, up from 54.23 on Monday.
FIIs have invested $2 billion in local equities and bonds since April 1. The governments move to cut the withholding tax for FIIs in their bond investments improved sentiments over dollar flows, dealers said.
The finance ministry said on Tuesday FIIs can pay a tax of 5% instead of the earlier 20% on interest received from their bond investments. Unilevers offer to increase stake in Hindustan Unilever also prompted banks to sell dollars. In the coming days, we can see a healthy dollar inflows because of the share buyback and so we saw some position building now, said a dealer at a public sector bank.
Unilever PLCs has offered to pay over $5 billion to increase its stake by 22% in its Indian subsidiary. Dealers said the currency could gain further ahead of the Reserve Bank of India's monetary policy due on Friday. Most in the market expect RBI to cut the repo rate by 25 basis points owing to ease in headline inflation and fall in global commodity prices. The gains made by rupee this week could spur dollar sales by exporters as well, dealers said.
This could help the currency gain to as much as 53.50 against dollar in rest of the week. However, much of the movement of rupee would now hinge on the monetary policy's outcome on Friday.