Indian rupee at fresh dollar high

The Indian economy has been a magnet to foreign investors

The Indian rupee has risen to its highest level against the dollar since 1998 on the back of continuing foreign support for its booming economy.

The rupee was worth 39.32 to the dollar in trading on Wednesday, maintaining a trend which has seen it rise 12% against its US counterpart this year.

Foreign demand for Indian shares and high levels of foreign investment have helped to propel the currency upwards.

But economists warned that the exchange rate was punitive for exporters.

'Strong fundamentals'

IT firms that have won a lot of software outsourcing contracts from US companies are likely to be worst affected.

This trend will continue for some time unless there is a political crisis in New Delhi or a catastrophic natural disaster Ram Upendra Das, economist

The rupee's ascent has matched that of the Indian stock market, whose benchmark share index climbed above the 18,000 mark for the first time on Tuesday.

Economists said they expected the trend to continue with the dollar weakening further before the end of the year.

"The fundamentals favour a strong rupee," said Ram Upendra Das, a trade economist.

"This trend will continue for some time unless there is a political crisis in New Delhi or a catastrophic natural disaster."

Foreign exchange dealers quoted by the Reuters news agency said the Reserve Bank of India had intervened in the market on Wednesday to limit the rupee's rise, one claiming the bank bought up to $1bn in currency.

The central bank's own figures show it has purchased more than $38bn this year.

Bank concerns

India's spectacular recent growth and its buoyant economic outlook is attracting investors in their droves, with foreigners snapping up $15.3bn worth of Indian shares this year.

While the strong rupee has helped to subdue inflation by reducing the cost of imports, economists are concerned about the impact on exporters.

They also believe policymakers are worried about the threat to general financial stability from potential volatility in capital flows.

With this in mind, credit ratings firm Standard & Poor's said it expected the central bank to "resist" further appreciation in the currency.