The rupee rose notwithstanding weakness in local stocks with Sensex paring 110 points gained in early trade and closing 19 points lower while dollar firmed against euro.
While India's June exports fell for the second straight month in the current fiscal, forex markets cheered the trade deficit dipping to USD 10.3 billion, the lowest in 15 months.
"Contraction in trade deficit will aid the government to manage its finances in an effective manner enabling it to target the (fiscal) deficit in line with estimates," said Pramit Brahmbhatt, CEO, Alpari Financial Services (India).
Additionally, dollar selling by exporters and some banks helped the rupee firm up, said dealers.
At the Interbank Foreign Exchange (Forex) market, the local unit resumed higher at 55.65 against previous close of 55.94 and immediately touched a low of 55.75 on early rise in shares amid a firm dollar overseas.
However, it rebounded later after the trade deficit data filtered in and touched a high of 55.10 before concluding at 55.15, showing a sharp rise of 0.79 paise or 1.41 per cent.
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This was biggest single-day gain since July 3 when it was spurted by 1.05 paise or 1.89 per cent. In last two days, it had dropped by 55 paise or nearly one per cent.
Foreign Institutional Investors (FIIs) remained buyers in this month with fund infusion of USD 1.3 billion till July 12, as per Sebi data. Today, they bought stocks worth Rs 281.13 crore, as per provional data from stock exchanges.
Abhishek Goenka, Founder and CEO, India Forex Advisors, said "The rupee was seen appreciating heavily on account of heavy dollar selling in the local market. The trade deficit declining has also helped the rupee to gain today." (MORE)