The Indian rupee rose to its highest in more than seven months on Monday, boosted by strong dollar inflows while broad weakness in the U.S. currency over the previous week also aided sentiment.
The partially convertible rupee was trading at 68.65/66 per dollar after touching 68.62, its strongest level since August 9. It had closed at at 69.10 on Friday.
The dollar licked its wounds after soft U.S. data increased bets the Federal Reserve will cut rates later this year while the pound hovered near nine-months high on hopes for a delay in Britain's exit from the European Union.
Other Asian units, however, were trading mixed against the dollar.
"We have seen large (dollar) inflows in the last few days hitting the market. USDINR swap window followed by lower trade deficit added to INR strength," said Paresh Nayar, head of trading desk at First Rand Bank in Mumbai.
Investors are bullish on the Indian rupee for the first time in nearly a year, a Reuters poll showed last week, as a recent surge in popularity of the country's ruling party is expected to bode well for its alliance in the upcoming national elections.
Foreign inflows into Indian equities and debt markets have surged, with $3.65 billion pouring in this month as of March 15. That compares with inflows of $1.58 billion in February and $788 million outflows in January, according to exchange data.
"I don't think many would have expected such sharp appreciation with the RBI not intervening aggressively and with inflows still lined up, the next support is 68.50," Nayar said.
In a bid to mop up dollars and pump in rupees, the central bank last Wednesday said it would conduct its first dollar/rupee buy-sell swap auction on March 26.
The RBI plans to swap rupees for dollars for a total fo $5 billion with domestic banks which is likely to help achieve its twin objectives of pushing interest rates down while also preventing a sharp appreciation in the rupee.