By Swati Bhat
MUMBAI (Reuters) - The Indian rupee strengthened to its highest level in more than two and a half months on Tuesday, tracking gains in other Asian currencies, with inflows into the domestic share market and the central bank's absence also supporting sentiment.
The partially convertible rupee closed at 73.0025/0125 per dollar, its highest since June 11, compared to its close of 73.26 on Monday.
Traders said dollar inflows into the local share market helped the rupee but most were expecting the Reserve Bank of India to step in to prevent sharp appreciation in the currency which did not happen.
"It is a bit confusing. We have seen the rupee gain quite a bit in recent sessions and though it is in line with other Asian currencies, there was broad expectation that the RBI will step in," a senior trader at a private bank said.
The rupee has gained 1.7% after rising in each of the last four trading sessions. It rose in six out of the last seven sessions.
"Yes, (RBI) stuck between the rock and the hard place. RBI should have patience till 72.15-72.85 before coming big," J. Moses Harding, president and chief executive officer at IndusInd International Holdings Ltd, wrote on twitter.
"RBI's only worry is from excess rupee liquidity and elevated yield spread at longer end of the curve."
Traders and analysts said the massive rupee liquidity in the banking system is likely one of the factors limiting the RBI's ability and intent to intervene in the forex market as it would further add to the rupee liquidity glut.
Most Asian currencies rallied on Tuesday, as the U.S. dollar slipped further following the U.S. Federal Reserve's dovish stance on tapering its bond purchase program, with Thailand's baht hitting a near two-month high.
The benchmark 10-year bond yield closed little changed at 6.22%, with traders awaiting the GDP data due later in the day for further cues and to get a sense of the RBI's policy normalisation timeline.
"With reports indicating that two-thirds of the population may already have antibodies against the coronavirus and the daily vaccination drive picking up, we argue that India may be one of the best placed in emerging markets to recover," Eugene Leow, rates strategist at DBS Group, wrote in a note.
"Risks of another COVID-19 wave notwithstanding, we think that the bond market will increasingly focus on inflation risks."
(Reporting by Swati Bhat; Editing by Rashmi Aich)