U.S. Treasury yields fell overnight after data showed the economy contracted again in the second quarter, suggesting that the Fed may not need to be so aggressive with rate hikes to cool inflation. [US/]

The partially convertible rupee ended trading at 79.25 against the dollar, 0.6% stronger than Thursday's close of 79.7550 and its best single-day performance since Aug. 27 last year.

It touched a session high of 79.17, its strongest since July 7.

"The recent correction lower in commodity prices is providing some respite to the INR, albeit likely only temporarily," Kunal Kundu, India economist at Societe Generale wrote in a note published Thursday.

"Growing market conviction that a U.S. recession is on the way and consequent safe-haven demand for the dollar are key near-term risks for rupee. The RBI's FX interventions should continue to limit rupee volatility," he added.

India's central bank has zero tolerance for volatile movements in the rupee and will continue to engage with the foreign exchange market to ensure the rupee finds its appropriate level, its chief Shaktikanta Das said last week.

The dollar languished near a six-week low against the yen amid a sharp retreat in Treasury yields. Almost all Asian currencies rallied against the greenback. [USD/] [EMRG/FRX]

The benchmark 10-year bond yield ended trading at 7.3196%, after falling to 7.2527% earlier, its lowest since May 12. It had ended at 7.3316% on Thursday.

India's stock markets and ended up 1.35% and 1.25%, respectively. [.BO]

Foreign fund flows will be a crucial factor determining the rupee's fortunes in the coming months. Foreign investors have been net sellers of Indian stocks worth more than $30 billion so far in 2022.

Traders will now shift their focus to the Reserve Bank of India's monetary policy review next week.

"With the Fed having stuck to a 75 bps hike and concerns of a global recession still looming, the RBI may announce a modest 25-35 bps increase in the repo rate next week," a senior trader at a private bank said.

"We will see the 10-year move in a 7.20% to 7.35% range until (then)," he added.

Barclays said they expect the RBI's monetary policy committee to vote unanimously for a 35 bps rate hike next week.

"While inflation is likely to remain elevated in the near term, we think the MPC may acknowledge that price pressures have peaked, and note the favourable tailwinds by reducing its inflation forecasts, albeit marginally," they added.

India's retail inflation remained painfully above the 7% mark and beyond the central bank's tolerance band for the sixth month in a row in June, but has shown an easing bias over recent months.

(Editing by Kim Coghill and Uttaresh.V)

By Swati Bhat