The rupee rose for the third straight day on Thursday, hitting a new 13-month closing high, but premiums on the forward dollar remained under pressure due to worries the United States could soon go to war with Iraq.
Traders said dollar purchases by the central bank, which wants to keep Indian exports competitive, curbed the domestic currency's gains.
The rupee ended at 47.80/81, up from the previous close of 47.8200/8275.
It has gained 2.6 per cent from its lifetime low of 49.08 per dollar, hit in mid-May last year, but analysts said the rupee was still undervalued by nearly 4.5 per cent on a trade-weighted basis, indicating there was an upside.
"Dollar inflows, especially trade remittances, continue as exporters think the rupee will gain further as it is undervalued," said a dealer at a state-run bank.
But importers and companies with foreign exchange loans continued to hedge in the forward segment, with rupee premiums continuing to rise for the sixth day as they priced in war risks.
The six-month annualised forward dollar premium climbed to four per cent from the previous close of 3.85 per cent. It has climbed nearly 85 basis points since late last week.
Forwards reflect hedging requirements and the difference in US and Indian interest rates.
Traders and importers fear a war in the Gulf could push up prices of crude oil, India's biggest import item, accounting for two-thirds of total annual imports of about $60 billion, which would eventually put some pressure on the rupee.
India imports 1.7 million barrels a day, and every $1 rise in crude prices inflates its import bill by $1.7 million a day or $620 million a year, analysts said.
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