The rupee, which dropped 16 percent last year in Asia's worst performance, has advanced 5.7 percent this month to be the region's biggest gainer. The sustainability of the rally will depend on euro-zone developments and economic data and policy guidance, both from home and abroad, according to BNP Paribas SA.

“The market may have underpriced risks of the current account widening further, a poor fiscal deficit and bad loans at Indian banks,” said Thio Chin Loo, a senior currency analyst at BNP Paribas in Singapore. “Market sentiment can shift very quickly and at these levels, when the rupee is approaching 50, I wouldn't advise corporates to chase a stronger currency.”

Exporters should look to convert their dollar earnings when the rupee hits 52 a dollar in the spot market, she said.

Eoin Treacy's view The Rupee dropped to a record low against the US Dollar in December as governance, corruption and interest rates concerns sapped investment demand. The decline coincided with the nadir of investor concern with the Eurozone and prompted repatriation of funds from a number of Asian markets. The Rupee has rallied emphatically over the last two weeks, as risk appetite has returned to the fore.

The commonality of the US Dollar's recent weakness, not only against the Rupee but also against a whole host of other currencies, supports the view that it may have reached a medium-term peak. While some distribution below the R54 area appears likely, a sustained move above that level would be required to suggest a return to Dollar demand dominance.

The weakness of the Rupee was at least in part driven by foreigners deserting the domestic stock market. The recent firming may reflect a reversal of that trend. The comparative strength of the currency bolsters the view that the stock market is forming a medium-term bottom.

I pointed out at a panel discussion for the CISI in London in September (Also see Comment of the Day on September 14th) that while India's stock market remained in a downtrend, its consumer related sector was outperforming. Little has changed. The Consumer Durable and Fast Moving indices continue to outperform. The Healthcare and Auto sectors have recently moved to positions of outperformance.

The Bombay Banks Index was a leader during the impressive rally from the 2009 lows and also led to the downside. The fact that it has recently moved to outperformance relative to the Nifty is therefore bullish. HFDC Bank remains a leader in the sector and is challenging its 2011 peak following an impressive rally from the late December low. The US ADR has underperformed due to the currency differential but should benefit if the Rupee has indeed hit a medium-term low.

Cement companies such as Associated Cement, Ultratech Cement and Ambuja Cements all remain leaders. Associated Cement remains in a consistent medium-term uptrend, where it has found support in the region of the 200-day MA on successive occasions. It bounced from the trend mean again this week and a sustained move below R1100 would be required to question medium-term upside potential. Ultratech Cement has been consolidating in the region of its previous highs for the last few months. A sustained move below R1100 would be required to question potential for a successful upward break. Ambuja Cements has a similar pattern.

Of the numerous India related funds in the Chart Library, the UK listed First State Indian Subcontinent Accumulation Fund is probably the best performer. It is one of the only ones I examined that does not have Reliance Industries among its largest holdings. It rallied impressively this week to break the six-month progression of lower rally highs and a sustained move above 190p would suggest a return to medium-term demand dominance.