The rupee was the second-best performer in Asia, rising the most in over five years on Friday, on lower global oil prices and as China and the United States expressed optimism about resolving their bruising trade war.
A decline in oil prices and the rally in the currency also boosted bonds, which rose to their highest in nearly two months.
"After a long time, the Indian rupee is seeing a day in the sun," said Anindya Banerjee, deputy vice president, currency derivatives, Kotak Securities.
"There were massive long dollar positions, which got hit once the rupee broke the 73 level. Large corporates sold dollars and squared up long positions. The next key trigger will be the mid-term US polls."
The rupee rose as high as 72.4350 vs the dollar, gaining 1.44 per cent during trade, the most since September 19, 2013. The currency closed just off the day's high at 72.44 versus 73.4750. There was large-scale unwinding of speculative long dollar positions on the rupee, which led to the sharp rally in the currency relative to its peers in the region, traders said.
Most Asian currencies rallied on hopes after a phone call between the US and Chinese presidents raised hopes of a thaw in trade tensions.
The 10-year benchmark bond yield touched an intraday low of 7.75 per cent, its lowest since August 8. It closed the day at 7.78 per cent versus 7.82 per cent on Thursday.
Going ahead, traders will closely watch the results of US mid-term Congressional polls next week for a cue on the dollar.
Back home they will also keep an eye on the liquidity crunch in the non-banking finance companies (NBFCs). The rupee is expected to touch 72 to the dollar next week as sentiment remains upbeat, dealers said.
A series of debt default by one of the largest infrastructure companies led to massive selloff in other companies as well in the NBFC space with investors worrying about their ability to repay their short-term debt.
Any major debt default by other companies is likely to shake investor confidence in overall financial markets in the country and hit all asset classes including bonds, rupee and stocks, traders said.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
