MUMBAI - The rupee staged a sharp recovery on Wednesday, following talk of possible fiscal and monetary steps to stabilise the currency and comments from a government official that the slide was overdone.
Despite strong GDP growth, the rupee has weakened more than 11 percent to become Asia's worst performing currency this year, hit by higher oil prices and an emerging markets sell-off, widening India's current account deficit and tipping its balance of payments into the red.
There was no fundamental rationale for the rupee to depreciate to the low levels of the previous session, Subhash Garg, the economic affairs secretary, wrote on social network Twitter.
"It (rupee fall) reflected overreaction of market operators. Government and RBI will do everything to ensure that rupee does not slide to unreasonable levels. Today's correction seems to reflect that realisation."
The comments further propped up the currency as intermittent dollar sales by the Reserve Bank of India through state-run banks continued to underpin sentiment, dealers said.
The currency had touched a record low of 72.92 per dollar before it gained as much as 1.4 percent to stand at 71.90.
The partially convertible rupee ended the session at 72.1950 per dollar, up 0.7 percent from a previous close of 72.7075, for its biggest single-day rise since May 25.
India's benchmark bond yield ended at 8.13 percent, down 5 basis points on the day and retreating from the day's high of 8.23 percent, its highest since Nov. 14, 2014.
"There has been talk of a rate hike since yesterday," said a senior trader at a private bank.
"The comments today have given some hope to the market that the RBI may do something, but the broader trend for the rupee continues to be downward."
Prime Minister Narendra Modi will review the economic situation on the weekend, Newsrise said, citing an official.
Fiscal and monetary measures cannot be ruled out after the review meeting, nor a rate hike by the central bank, television channels said, prompting a recovery in the currency from record lows.
Traders await August inflation data due later on Wednesday, which is expected to undershoot the central bank's medium-term target.
Markets will be closed on Thursday for a religious festival.
Most analysts have said the rupee's fall has largely been driven by global factors and is in line with fundamentals, but political considerations ahead of general elections in 2019 could prompt action from authorities.
"A weaker rupee is a function of global factors rather than idiosyncratic factors," foreign exchange analysts at Nomura wrote in a note.
"From that perspective, an aggressive stance on monetary policy may prove counter-productive to growth dynamics and may end up hurting growth-sensitive flows."