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The currency market startled investors by its relative stability on a day domestic equities plunged to wipe out the entire gains this year for its broadest gauge. The rupee hit only a two-and-a-half-month low to the dollar before paring its losses, signaling that overseas debt investors are still keen to buy Indian debt.

"We are positively surprised with the way the rupee has remained stable," said Manish Wadhawan, MD & Head – Fixed Income, Global Markets at HSBC India. "Nothing unusual has happened in the currency market even though the equity markets have fallen. Global investors have remained relatively calm and we have not seen any panic selling in the currency market."

The rupee lost 0.28% to the dollar, closing at 64.25.

"The rupee may go through a volatile phase amid rising global uncertainties. Given that the volatility index has remained low in the past few weeks, this would be more of a natural correction," Wadhawan said.

During the day's trading, it dipped as low as 64.40 as the local stock market tanked, mirroring global weakness. The currency market erased some of its losses after the central bank is said to have intervened: Some state-owned banks were seen selling dollars, dealers said.

Foreign portfolio investors sold about Rs 2,300 crore worth of Indian equities, show BSE provisional data. The exit mode sparked off some dollar buying demand. A sharp stock market crash in US triggered sell-offs across emerging markets.

But overseas debt investors are likely to have bucked the trend. This calendar year they have bought Rs 13,096 crore worth of debt securities.

"There is no fundamental trigger for overseas investors to exit Indian securities," said Brijen Puri, MD and Head of Currency and Emerging Markets, JP Morgan, India. "The currency market may still see some volatility amid global uncertainties, but nothing that is likely to trigger any abrupt sell-offs of the local currency."

Some traders warn of future swings as the one-month implied volatility index has risen for consecutive five trading sessions in the rupee-dollar pair.

The Bloomberg Implied Volatility Index (one-month) has been gradually rising since past few weeks. It closed at 5.82 on Tuesday compared with 4.74 more than a fortnight ago.

Currency traders are now staring at RBI's bi-monthly as a tighter policy stance may impact markets.

"RBI's monetary policy is going to be a major event for currency and rates markets," said Anindya Banerjee, currency and rate analyst at Kotak Securities. "A hawkish RBI, though maybe negative for bonds, can support the rupee through positive expected real rates."

The benchmark bond yields fell four basis points to close at 7.57% on Tuesday.

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