By Swati Bhat
MUMBAI (Reuters) - The rupee rallied for a second consecutive session on Friday to its strongest against the dollar in nearly two weeks on growing expectations the currency has been badly oversold, even as few traders expect a meaningful recovery.
After hitting a record low of 68.85 to the dollar last week, a Reuters poll suggests the rupee will stabilise at 66 to the dollar by the end of September, while technical charts also point to a period of relative calm.
Sentiment has also improved since Reserve Bank of India Governor Raghuram Rajan unveiled a slew of proposals to support the rupee and open up markets on Wednesday, providing a breath of fresh air for investors unnerved by the country's worst economic crisis in two decades.
Still, traders are monitoring global developments. The United States posts monthly employment data later in the day, which could help determine a timeline on when the Federal Reserve will taper its massive stimulus programme, while concerns about war in the Middle East could also sour sentiment.
Markets in India are closed on Monday for a public holiday.
"I think the rupee has already touched a near term bottom. We have to watch how the tension between U.S. and Syria builds up because if war breaks, one more leg down may be seen but I still expect 68.80 to be the bottom," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
The rupee rose 1.2 percent to close at 65.24/25 to the dollar, further building on a 1.6 percent rise on Thursday following the euphoria at the debut of the new RBI governor.
The RBI has so far been the main line of defence against the rupee with controversial measures to drain cash from markets and raise short-term interest rates.
It has also been intervening heavily, helping the rupee gain 0.7 percent this week, snapping a three-week losing streak.
The RBI said foreign exchange reserves for the week to August 30 fell by $2.2 billion to $275.49 billion.
NEED TO ACT
The Reuters poll expects the rupee to firm to 65 rupees per dollar by November and 64.5 by August 2014.
Still, traders say the government will need to do its part by passing politically tough reforms needed to fix the economy, even with general elections due by next May, with growing speculation of a potential hike in fuel prices.
The need to act is seen by markets as pressing ahead of a potential burst of volatility in global markets. The most immediate global trigger could be U.S. non-farm payrolls later in the day.
Fears of Fed tapering have roiled emerging markets such as India for months, prompting foreign investors to sell currencies, stocks and bonds, which has supported the dollar against other currencies.
"The Governor's action plan was well accepted by market participants," said Shakti Satapathy, a fixed income strategist with AK Capital.
"But the key would be the government's intent in addressing the CAD (current account deficit) and subsidy burden at a faster pace amidst positive U.S data points that might lead to an early exit by Fed's from the stimulus measures," he added.
Measures so far, including steps to curb gold imports and raise dollar inflows, have failed to impact markets much.
Japan and India decided to expand a bilateral currency swap facility to $50 billion from $15 billion, the two countries announced on Friday.
Meanwhile, the BRICS emerging economies will set up a $100 billion fund to steady currency markets, Russian President Vladimir Putin said on Thursday.
In the offshore non-deliverable forwards, the one-month contract was at 66.03 compared to the onshore contract at 65.76, suggesting offshore players remain more bearish.
(Editing by Rafael Nam and Nick Macfie)
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