Senior officials at the Reserve Bank of India said on Wednesday the rupee's recent rise was in line with global currency movements, comments that traders said paved the way for the unit to record more gains.

"We feel that the way the exchange rate has moved is quite adequate in relation to the international movement between currencies. We have an open economy," Reserve Bank of India Deputy Governor Rakesh Mohan told Reuters in Bangalore on the sidelines of a banking conference.

The rupee broke through a key support level of 46.80 to the dollar on Wednesday morning, rising from the previous two-year closing high of 46.90/91. It is up 2.5 per cent so far in 2003.

Its gains have fed into other markets, with forward dollar premiums crashing and pulling down interest rate swaps, while shares in the export-oriented tech sector have been weighed down by concerns about software companies' foreign exchange earnings.

"There is no question of comfort or discomfort in regard to movement of the rupee," another senior central bank official, who declined to be named, told Reuters.

"The RBI will continue to closely watch the situation so that our market remains orderly and generally stable."

The dollar's sharp global slump in 2003 has left the rupee undervalued in trade-weighted terms by an estimated 2.5 per cent at the start of trade on Wednesday, according to JP Morgan.

"It appears that the RBI has chosen the path of allowing the rupee to appreciate, trying to ensure some two-way interest in the dollar," said the head of trading at a foreign bank.

"The rupee is headed for 46.50 in a hurry. I won't be surprised if it happens by the weekend."

Ripple effect

The rupee's appreciation, supported by robust trade and investment inflows, has pulled down premiums on forward dollars to near zero, which in turn has dragged down interest rate swaps.

The central bank's dollar purchases to smoothen the rupee's climb has boosted the domestic fund supply, which along with falling premiums, have spurred expectations of a repo rate cut.

The annualised premium on the six-month dollar has eased 343 basis points in 2003 to 0.11 per cent on Wednesday, much lower than the 3.5 percentage point difference between Indian and US rates on six-month money.

Bankers said with hedging costs now negligible, foreigners were chasing high-yielding investments in the country.

Expatriates favour rupee deposits, paying five per cent a year over dollar deposits, which pay one per cent.

Foreign funds have stepped up investments in Indian fixed income assets, which they have traditionally ignored because of the exchange rate risk.

A one-year Indian treasury bill yields 4.68 per cent, against the 1.31 per cent on a two-year US treasury bill.

Rates on swaps linked to term rupee benchmarks derived from forward dollar premiums have also slumped because of the sharp slide in the premiums.

The five-year swap linked to the six-month implied rupee rate has fallen by around 2.5 percentage points in 2003 to 2.75/88 per cent on Wednesday.