Rupee dips as shares fall, dollar gains.

MUMBAI (Reuters) - The rupee eased on Monday as the dollar gained against major currencies and domestic stocks fell, offsetting support from a surprise rate increase by the Reserve Bank of India (RBI).

"Ideally the rupee should have appreciated due to the rate hike, but equities are down and the dollar is stronger, which is causing the rupee weakness," said Vikas Chittiprolu, a senior forex dealer, with state-run Andhra Bank.

At 10:20 a.m. (0450 GMT), the partially convertible rupee was at 45.51/52, marginally weaker than its Friday's close of 45.50/51.

The central bank raised rates late on Friday in its first increase since it began cutting in 2008 and cited intensifying inflationary pressures and a steady economic recovery for the move.

"There hasn't been much reaction to the rate hike as the market was somewhat expecting it, only the timing was the suspect," said Madhusudan Somani, head of foreign exchange trading, at Yes Bank.

He said the market was expecting another 25 basis point hike in policy rates at the central bank's April 20 policy review.

"The view for the rupee still holds, expecting weakness till about 45.80-46.00 levels," Chittiprolu said.

Shares fell 1 percent early with financials leading the decline after the rate hikes.

Foreign fund flows into the sharemarket are a key support for the rupee. Foreigners have so far in 2010 bought shares worth a net $3.4 billion, adding to record inflows of $17.5 billion in 2009

 The euro hovered at its weakest levels in three weeks on Monday and the dollar remained firm as Europe remained divided over aid to debt-burdened Greece ahead of a summit later this week.

The index of the dollar against six major currencies was up 0.2 percent.

One-month offshore non-deliverable forward contracts were at 45.58, weaker than the onshore spot rate. The one-year onshore dollar premium edged up to 135 points from 129.50 points at close on Friday.

In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX were both at 45.53, with the total traded volume on the two exchanges at about $1.1 billion.

Source : REUTERS