At 10:55 am (0525 GMT), the partially convertible rupee was at 45.69/70 per dollar, close to its previous close of 45.71/72. It had risen to 45.2850 on Monday, its strongest since September 22, 2008.
"The rupee dropped yesterday following China's reserve requirement ratio hike. There is an expectation that the Reserve Bank of India may follow and hike CRR and also the reverse repo," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
China on Tuesday raised the reserve requirement ratio, the proportion of deposits that banks must hold in reserve, by 0.5%, effective from January 18.
Dealers said fears that tighter policy in China could hamper its growth weighed on markets in Asian economies that had benefitted from its strong recovery.
Most Asian units were weaker compared to the US dollar. The index of the dollar against six majors was up 0.1%.
However, dealers said most of the rupee's reaction to China's move was seen in a sharp fall in late trade on Tuesday, when the currency ended down 0.8%.
The Reserve Bank of India is scheduled to review its policy on January 29, and signs of strengthening growth and inflation pressures have the market factoring in tighter policy.
"We believe that strong incoming growth data and increasing inflation risks warrant at least a 25 basis points hike in the reverse repo rate," Morgan Stanley economists Chetan Ahya and Tanvee Gupta said in a note.
"In addition, we do not rule out the possibility of a 25 basis points hike in the repo rate and/or 50 basis points hike in Cash Reserve Ratio," they added.
Data on Tuesday showed industrial output rose an annual 11.7% in November, beating forecasts and traders are waiting for December inflation data on Thursday for more cues.
Wholesale price inflation is seen at 7.31% in December from a year earlier, the median forecast in a poll of 22 economists showed.
The yen held broad gains on Wednesday while commodity currencies such as the Australian and the New Zealand dollars were subdued as investors unwound short-yen positions following China's step toward tighter policy.
The BSE Sensex fell as much as 0.8% in early trade, recovered most losses.
Foreign fund investments into the local sharemarket are a key driver for the rupee. Foreigners have bought about a net USD 1.7 billion worth of shares so far in 2010, adding to the more than USD 17 billion invested in 2009.
One-month offshore non-deliverable forward contracts were quoted at 45.64/74, little changed from the onshore spot rate.
In the currency futures market, the most traded near-month contracts on the National Stock Exchange and MCX-SX were both quoting at 45.7325 each, with the total traded volume on the two exchanges at about USD 1.7 billion.
Source: Reuters
Courtesy moneycontrol.com
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