Reuters

Mumbai, Jun 25: The rupee strengthened on Wednesday after the central bank aggressively raised a key interest rate, prompting exporters to sell dollars on expectations for a stronger currency in the coming days.

At 10:40 a.m., the partially convertible rupee was at 42.86/87 per dollar, about 0.2 percent stronger than Tuesday's close of 42.9625/9700.

After the market closed on Tuesday, the central bank raised its key lending rate by 50 basis points to 8.5 percent with immediate effect, its highest since March 2002 and the second hike this month.

It also raised cash reserve ratio, the proportion of deposits banks must keep with the central bank, to 8.75 percent from 8.25 percent in two stages of 25 basis points each on July 5 and July 19.

"The rupee's rise is more an immediate reaction to the rate hike," a state-run bank trader said. "Higher interest rate is net-net positive for the rupee, but the stock market and oil prices will remain key factors."

India's main share index opened 2.3 percent lower, led by financial stocks as the rate rise was expected to crimp consumer spending and hurt corporate profits.

Traders said they would be watching foreign portfolio flows, which have a bearing on the rupee.

Foreigners have been net sellers of $6.1 billion of Indian stocks so far this year, after buying a record $17.4 billion in 2007.