India's rupee gains after rate hike

India's rupee rose marginally against the dollar on Tuesday after the central bank hiked short-term interest rates to shore up the beleaguered currency and reduce speculation.

The partially-convertible Indian currency gained in opening trade to touch 59.42 to the greenback at 0515 GMT, from a previous close of 59.85 rupee level.

The Reserve Bank of India announced on Monday night that it was raising the marginal standing rate used to lend to commercial banks when there is a shortage of funds in the market.

It also raised the bank rate at which it lends to commercial banks in a sign deposit rates should be increased.

"The rupee will appreciate further from here," said Param Sarma, chief executive of NSP Forex, on Tuesday, expecting levels of 58.5 by next week.

The rupee has been the worst performing major Asian currency this financial year, dropping to a record low of 61.20 to the dollar last week.

The fall is attributed to expectations of a rollback in US monetary stimulus that has spurred investor flows from emerging markets, combined with a sharply slowing domestic economy.

Abhishek Goenka, chief executive of consultancy firm IndiaForex called the RBI's moves "positive for the rupee in the short-term".

"The RBI and the finance ministry are getting active to announce measures to help boost the rupee," he told AFP.

The RBI action is aimed at making it more attractive for investors to hold the rupee but will disappoint business leaders who have been clamouring for lower rates to boost economic activity by making borrowing costs cheaper.

The announcement of the bank's measures came after talks between Prime Minister Manmohan Singh and Finance Minister P. Chidambaram and monetary authorities.

Besides global factors, the rupee has been dragged down by a record Indian current account deficit, the broadest measure of international trade.

The deficit stems mainly from huge oil and gold imports and weak exports.

Indian shares, particularly banks and financial institutions, slid 1.22 percent to 19,790.78 points on Tuesday morning.

Analysts said bond yields also rose in early trade Tuesday, which may encourage inflows into the country.

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