The rupee rose to a three-week high on Tuesday, extending gains for a third consecutive session on the back of a more favourable global risk environment and large dollar sales by domestic companies.
Traders also cited cautious optimism after newly-appointed Finance Minister P. Chidambaram signalled on Monday his intent to push pro-investor policies and undertake fiscal reforms, though most said they would wait for actual action.
"The rupee would need very concrete measures to appreciate beyond 54-53.50 to the dollar. Investors will not buy in unless they see concrete action," said Naveen Mathur, associate director, currencies & commodities, Angel Broking.
"The high probability is for the rupee to trade in range with a depriciation bias."
The partially convertible rupee closed at 55.0650/0750 per dollar as per the SBI closing rate versus its previous close of 55.52/53.
During the session, the rupee rose to as high as 55.07 in the session, its strongest against the dollar since July 18.
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Global risk sentiment continued to remain favourable with the euro climbing to a near one-month high against the dollar, supported by expectations the European Central Bank will act soon to lower borrowing costs for Spain and Italy.
The Sensex rose at one point to its highest since April 3, before ending up 1.1 percent.
Dealers said large corporate flows during the session also helped the rupee gain. A foreign telecom company was estimated to have sold about $180-$190 million, while a large engineering company was also a large dollar seller.
Whether the rupee can sustain gains would largely depend on global risk factors, as well as on whether the government can deliver on its talk.
"Overall, we view the Finance Minister's statements as positive and a promise that decision-making is set to accelerate. However, it is too early to rejoice. The government now has to walk the walk," Nomura said in a note on Tuesday.
The one-month offshore non-deliverable forward contracts were at 55.33, while the three-month was at 55.97.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 55.26 with the total traded volume at around $4.2 billion.
(Editing by Rafael Nam)