By Swati Bhat
MUMBAI (Reuters) - The rupee strengthened on Tuesday as the Reserve Bank of India's monetary policy was in line with market expectations and traders are now focusing on the outcome of the U.S. Federal Reserve's policy statement due on Wednesday.
The RBI raised interest rates for the second time in as many months, warning that inflation is likely to remain elevated despite sluggish growth, and rolled back an emergency measure put in place in July to support the rupee.
Although the central bank raised interest rates at a time when the rate at which the economy is growing is at a decade low, investors reacted with relief as some traders had feared a bigger rate hike due to inflationary pressures.
With the RBI policy out of the way, traders say the Federal Reserve's meeting this week will be in focus, although they expect the rupee to remain largely range-bound.
"The Fed policy review will be important to the extent of the details of the taper but otherwise I expect the rupee to remain in a broad range of 61.20 to 61.90 over the next two weeks," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
The partially convertible rupee closed at 61.31/32 per dollar compared with 61.52/53 on Monday.
The dollar rose against a basket of currencies on Tuesday as some investors trimmed bets against it, having already factored in expectations that the Fed will keep policy accommodative in the near term.
The rupee also benefited from a rally in domestic shares. The BSE Sensex rose 1.74 percent, snapping a five-day losing streak to hit the highest close in nearly three years, as lenders surged after the RBI's policy review.
In the offshore non-deliverable forwards, the one-month contract was at 61.91 while the three-month was at 62.92.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 61.76 with a total traded volume of $1.7 billion.
(Editing by Anupama Dwivedi)