The Indian rupee strengthened marginally on Thursday, after it fell sharply on Wednesday (4 February), as the slide in the currency tracking lower stocks and stronger dollar, was overdone.
The surprise rate cut by Reserve Bank of India on Wednesday failed to prevent a weak closing of the rupee, even though lower rates generally spur growth, as the focus soon shifted to the sharp rally and profit-taking in the greenback.
USD/INR slipped to 62.04 from Wednesday's close of 62.29. The pair had touched a three-week high of 62.40 before ending lower in the previous session.
The RBI had cited faster-than-expected disinflation in Asia's third largest economy and improving fiscal health, as reasons for the surprise 25 basis points cut in the benchmark repo rate that took it to 7.5%.
The 30-share benchmark Sensex of the Bombay Stock Exchange ended 0.72% down at 29,380.73 on Wednesday, after rising to a record 30,024.74 during the day. On Thursday, the index closed 0.23% higher.
The Indian government is keen on maintaining inflation below 6% for 2015-16 under the new monetary policy framework agreement signed with RBI and announced on the budget day.
RBI said the quality of fiscal consolidation has improved even though there are concerns about the government's decision to delay meeting the 3% fiscal deficit target by a year to 2017-18.
The USD index, the gauge that measures the strength of the greenback against a trade-weighted basket of six major currencies, has risen to a 11-year high of 96.28 on Thursday, from the previous close of 95.94.
After three weeks of losses, the index started rising in the week to 20 February, by now, it has rallied 2.3%. It was this week the USD gauge that has broken through the January peak of 95.47 to a new multi-year high.
Better-than-expected economic data from the US as well as negative data surprises from the eurozone and UK helped the greenback rally.
The market is now waiting for policy decisions by the European Central Bank and Bank of England scheduled later in the day. Any dovish surprise from their end will push the US currency further higher, weakening the prospects of other currencies traded against that.