Rupee closes at 39.95/96 per dollar

The rupee climbed to its highest close in five days on Friday, after inflation shot to a three-year high and triggered hopes the central bank would let the currency appreciate to rein in prices.

The partially convertible rupee ended at 39.95/96 per dollar, 0.18 percent above Thursday's close of 40.025/035. Weekly data showed annual inflation as measured by the wholesale price index soared to 7.0 percent on March 22, its highest reading since Dec. 4, 2004 and far exceeding analysts' expectations of 6.62 percent.

The data triggered talk the Reserve Bank of India (RBI) may raise rates at a policy review on April 29 or would allow outsized appreciation of the rupee to rein in inflation. "If the RBI raises interest rates, that would add to the rate differential," said V. Rajagopal, head of currency trading at Kotak Mahindra Bank.

"Historically, we've seen the rupee gaining when this has happened and again today, sentiment is in this direction." India's benchmark lending rate at 7.75 percent is 550 basis points more than the U.S. federal funds rate of 2.25 percent, making investments in Indian assets more attractive.

Goldman Sachs said in a note after the inflation data the central bank may raise rates by 50 basis points in April and also expects it to allow the rupee to rise by 4 percent in 2008/09. Traders were also waiting for weekly U.S. job data which will provide clues on state of the health of the world's biggest economy.

According to a poll, U.S. employers are seen cutting payrolls for a third straight month in March, dropping 60,000 jobs after cutting 63,000 non-farm payrolls in February.