The rupee strengthened on Tuesday on hopes the government would kick-start long-awaited fiscal reforms by hiking fuel prices, but further gains were prevented by dollar demand from oil firms and a week full of key events.
The Sensex rose 0.5 percent to a three-week closing high on rising hopes for fiscal reforms after Oil Minister S. Jaipal Reddy said the country needed to hike the price of subsidised fuels such as diesel in the near term.
However, investors were also cautious ahead of Wednesday when the German Constitutional Court will rule on the legality of the euro zone's bailout funds and ahead of the outcome of the Federal Reserve's meeting on Thursday.
At home, India is awaiting industrial output data (IIP) on Wednesday, inflation numbers on Friday, which will be followed by Reserve Bank of India's policy review on September 17.
"The outlook for the rest of the week depends on the German court ruling and the IIP number. I expect the German court to clear the ESM bill but with strict conditions," said Sameer Lodha, managing director at QuantArt Market Solutions.
The unit closed at 55.34/35 per dollar as per the SBI closing rate, slightly stronger than its close of 55.44/45 on Monday.
The unit moved in a band of 55.3450 to 55.54 during the session, with dollar demand from oil importers capping any stronger gains in the rupee.
In the offshore non-deliverable forwards, the one-month contract was at 55.61 while the three-month was at 56.23.
The USD/INR premium in the currency futures market, especially in the six-month tenor, is sharply below the onshore forward market and provides a good opportunity for importers to hedge their six-month forward payments, analysts said.
In the currency futures market, the most-traded one-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 55.47 with a total traded volume of around $2.76 billion.
