Rupee up, opens at 62.85 vs $ against Thursday's close of 63.11

Mumbai: The rupee breached the 63-mark in early trade on Monday to open at 62.85 per dollar, up 26 paise from Thursday's closing of 63.11 per dollar.

The rupee rose on Thursday after suspected RBI intervention to prop up a currency wounded after data showing accelerating inflation threatened to further undermine confidence in an economy growing at its lowest pace in a decade.

The data is also raising prospects of India entering a dangerous cycle where a weaker currency creates more inflation, which in turn hits confidence and further depresses the rupee.

The unease in markets is being exacerbated by renewed fears of an early end to tapering by the US Federal Reserve and comes even as central bank governor Raghuram Rajan on Wednesday tried to calm investors' nerves.

However, confidence derived from Rajan's comments was partly wiped out after data on Thursday showed India's wholesale price index rose to an eight-month high in October.

The return of inflation fears led to a so-called devolvement in the sale of 2020 bonds at the weekly auction, meaning the RBI rejected some bids and forced primary dealers to buy the debt at the prescribed cut-off stipulated by the central bank.

"It (high inflation) suggests policy rates will remain elevated and RBI may not weed itself out of a hawkish tone anytime yet," said Suresh Kumar Ramanathan, head of regional interest rate and FX strategy at CIMB Investment Bank in Kuala Lumpur.

"It's also dissapointing that past rate hikes have not been fully effective in arresting inflation, which suggest that much of the weakness in WPI may have been due to exchange rate related factors, rather than supply and demand factors."

The RBI devolved 4.61 billion rupees of the total 40 billion rupees of 8.12 percent 2020 bonds available for sale at the weekly auction.

Data on Thursday showed wholesale inflation rose to an eight month high of 7 percent. It came after data on Tuesday showed consumer price inflation accelerated more than expected.

Rajan on Wednesday sought to provide reassurance about inflation, calling the downward trend in core consumer prices comforting despite acknowledging that food prices were "worryingly high".

The RBI has already raised interest rates twice for a total of 50 basis points since September and although analysts found Rajan's comments heartening, they said the RBI would continue to be guided by the data ahead of the next policy review in the middle of next month.

That will leave the RBI with a tough decision about how to balance the needs of a slowing economy at a time of continued inflationary presures.

"We are still skeptical regarding the rupee's fate, as it relates to the external deficit and the ability of the RBI to balance growth and inflation trade-offs," Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong, said in a note.