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Increased demand for the US currency from importers and rise in the value of the dollar against rivals overseas exerted pressure on the rupee, which led to the drop in value.
The rupee was trading at 64.51 against the US dollar at the forex today.
A weak dollar in overseas markets and selling of the US currency by exporters and banks supported the rupee in opening trade, forex dealers said.
Forex assets continue to remain stable at USD 364 billion which does not warrant a sharp appreciation on a continuous basis, experts said.
The rupee rose by another 47 paise to hit a new 16-month high at 65.22 against the dollar in early trade today.
Indian rupee hit a 16-month peak against the dollar on Wednesday on hopes of increased foreign investments in equities.
Selling of the US dollar by exporters and banks and its weakness overseas gave the rupee an upperhand.
Increased selling of the US currency by exporters and banks amid higher foreign inflows following BJP's resounding win in UP and positive IIP numbers.
Modi's victory in Uttar Pradesh strengthens his claim to a second term in national elections in 2019, and is seen as an endorsement of his economic reform agenda.
Burgeoning capital inflows into the booming Indian economy backed by strong macro environment largely supported home currency to stay afloat.
Foreign funds bought shares worth a net of Rs 920.46 crore yesterday as per the provisional figures from exchanges.
Foreign funds made a net investment of Rs 1,528.48 crore last Friday as per the provisional figures issued by exchanges.
The rupee notched up gains against the dollar, which added to the sunny side.
Forex dealers said that besides selling of the American currency by exporters and banks, weakness in the dollar against other currencies overseas propped the rupee.
The strength of the dollar overseas on growing expectations of a Federal Reserve rate hike this month, limited the gains.