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The Indian rupee rose significantly today on Forex as the markets were restoring from the recent sharp fall and the economies of the developing countries started to receive more capital inflows.

The Indian currency gained more than 1% after reaching its half-year bottom rate against the U.S. dollar on March 17. U.S. Federal Reserve lowered the interest rate last week and ruled out the problematic situation with Bear Stearns bank bankruptcy.

The rupee is expected to grow for as long as the investors look positively on the regional stock markets and provide a continuous dollar inflow into the country. Indian monetary authorities might also use the rupee’s appreciation to fight the rising inflation.

Today USD/INR rate decreased to 39.875 from the previous close at 40.4275 on March 19 (it wasn’t traded on 20 and 21 due to the national holidays). According to some currency strategists rupee may reach 39.000 by the end of the month.

Indian rupee continued to advance in value during today’s Forex trading session as the investors bought local currency to participate in the Indian stock market’s rally.

The Asian financial markets continued to grow today attracting more traders and spurring the growth of the regional currencies. Rupee also benefits from the tightening monetary policy in U.S. combined with the high interest rates on Indian government bonds.

This two days long rupee’s rally started after the major downfall of the currency, which reached the 5-month low record last week at 40.25 per U.S. dollar.

The inflow of dollars into the national markets moved rupee up — INR/USD went from 39.965 on yesterday’s close to 39.933 earlier today.

With a very fast economic growth India remains one of the most attractive to investments Asian regions. High interest rates and appreciation of the Chinese yuan can make Indian rupee a good high-yielding investment for this year.

The majority of Forex traders expected that the Reserve Bank of India will lower the main interest rates today to pare with recent emergency cut by the Fed and the anticipated additional interest cut at tomorrow Fed’s meeting. But Yaga Venugopal Reddy, Governor of the Reserve Bank of India, decided to leave the key interest rates at the same level.

The main repurchase rate was kept at 7.75% — one of the highest rate level in near six years; two other key interest rates were also left unchanged.

Previous expectations of the rates cut led to the growth of the Indian stock market, which was almost eliminated after the rates decision has been announced.

It seems now that the central bank is more worried with the rising inflation that is growing on oil and food prices, than the possibility of the economy recession. And that can be justified especially if the economy is currently feeling quite well despite the global instability.

Palaniappan Chidambaram, the Finance Minister of India, said yesterday that the latest emergency rate cut by the Fed will probably influence the next interest rate decision by the Reserve Bank of India.

The difference between the Indian and U.S. interest rates, even before the last Fed’s cut, has been adding to the demand for the rupees and Indian bonds. After the cut, rupee’s appreciation began to accelerate, adding pressure to the Indian economy.

Palaniappan Chidambaram has said during the interview at the World Economic Forum in Davos:

The interest rate differential between India and the U.S. has widened. That’s something the central bank will take on board, I suppose, before it decides its policy.

Current inflation rate in India, which is below the Reserve Bank’s target level, allows a reducing decision on the interest rate. And market participants are already expecting the cut, which would help to boost the financial market growth even as the global volatility rises.

If on 29th of January Reserve Bank of India will decrease the interest rates, it will be first such step in almost four years during which the rates were increased nine times.

Indian Finance Minister, Palaniappan Chidambaram, said yesterday that the the rupee’s value is determined only by the market participants and is not regulated by the government in any way. The Indian rupee lost 0.5% this week falling down to 39.555 against the U.S. dollar after almost three weeks of gain. Indian currency gained more than 12% against dollar and about 6% against a bucket of six major world currencies.

P. Chidambaram was giving commentaries to the reporters in Mumbai yesterday:

We don’t have a view on the rupee. It is market-determined. The rupee’s appreciation or otherwise gives rise to stress in some sectors. We will address those problems.

The appreciation problem for rupee is important to Indian economy, because more expensive rupee makes Indian exported goods to cost more. Of course, it drives up the competition level, thus making producers to increase the product’s quality, but it is also dangerous to the economy growth. “Addressing this problem” may include rupee interventions into the country’s Forex market by central bank, as it has already happened recently. Other measures to help Indian exporters may include duties and taxes easing.

While growth of the national currency’s value is inevitable for such a fast growing economy as Indian, the exchange rate with particular foreign currencies can be kept at a reasonable level by the government. And as Finance Minister says that rupee’s exchange rate is determined by the market, traders should also understand, that rupee won’t be allowed to reach high highs against dollar and euro; the first signs of currency’s depreciation will be met happily by the Indian government.

Indian rupee continued its decline against U.S. dollar started more than a 10 days ago. Fueled by the demand for foreign oil, dollar buying weakens rupee as the interbank Forex traders massively sell rupees.

Rupee is falling since November 14, when the carry trade slump started to affect Indian economy. With higher global volatility investors decreased their appetites for the risky Indian equities and thus the Indian rupee too. Today USD/INR rate reached 39.88 compared to yesterday’s 39.79 close on Forex.

Intervention of $52 billion in rupees by Reserve Bank of India on November 24 was also a sign that India doesn’t want a strong dollar, but would prefer a weaker rupee. So, the traders now have three reasons to sell rupee: higher demand for expensive oil, lower demand for Indian stocks, intervention by central bank.