The rupee briefly rose to a four-month high on Monday, spurred by hopes of major foreign inflows after the government announced it was opening up of the aviation and multi-brand retail sectors to more overseas investment.
The government's big reform push came a day after it approved a steep hike in diesel prices in a bid to cap subsidies and lower its fiscal gap.
Analysts say the moves could provide a major push to the beleaguered rupee, which has rallied 3.1% against the dollar since its Thursday close but is still down around 12% from levels seen last September.
"These reform moves are necessary help reverse the drastic FDI contraction seen thus far this year into India," Nizam Idris and Teresa Lam, strategists at Macquarie Bank, said in a research note.
They advised investors to go long on the rupee versus the dollar on the back of the reform moves and likely fund inflows from the Federal Reserve's third round of quantitative easing announced last week.
At 9.22 am local time, the rupee was at 53.80/75 to the dollar against its previous close of 54.30/31. At one point, it rose to a high of 53.66, a level not seen since May 15.
The market is now awaiting the RBI's rate decision at 11 am, with any rate cut likely to lead to a further rally in the rupee.
While most economists expect the central bank to remain on hold, a section of the market is beginning to expect a rate cut or at least a change in the central bank's hawkish stance.
A rate cut is expected to lead to a further rally in the rupee, dealers said.
"A rate cut will be positive for rupee and stocks. The rupee may rise further to 53.25 to the dollar if the RBI cuts by 25 basis points, a level where the dollar will find support," said Hari Chandramgathan KK, a dealer at Federal Bank.
Meanwhile, the BSE benchmark index Sensex rose by 218.37 points, or 1.18%, to 18.682.64.
The rupee had gained 113 paise to close at 54.30 in the previous session.
