The rupee closed stronger on Friday, ending the week with a 0.7% gain as foreign investors bought local debt, but analysts said the local unit will remain under pressure in the near term.
The partially convertible rupee ended at 52.7150/7250 to the dollar, 0.5% stronger than Thursday's close of 52.98/99.
"People are looking for cues like an improvement in general risk appetite, including the situation in Europe, measures to improve India's fiscal deficit, and stock flows," said Chin Thio, senior FX strategist, BNP Paribas in Singapore.
Thio expects the rupee to trade in a 52.00-54.00 range in the near-term.
The rupee is also likely to take direction from the movement of the dollar against other major currencies.
The dollar is now in a consolidation mode, but looks set for extended gains, which builds a strong case for extended rupee weakness, said J. Moses Harding, head of asset-liabilities committee at IndusInd Bank, a private sector lender in Mumbai.
Dollar inflows due to foreign institutional investors buying Indian debt, supported the rupee during the session, despite choppy local shares and a global risk averse sentiment.
In late November, Securities Exchange Board of India, the capital market regulator, auctioned the enhanced debt limit for foreign funds, which was oversubscribed.
Foreign funds have to use up the limits to buy government debt by mid-January, which will otherwise expire.
Net inflows into debt so far in January, at $1.03 billion has far outstripped equity related flows which stands at $190 million, data from the Securities & Exchange Board of India showed.
Exporters selling dollars also aided the local unit, traders said.
Indian shares erased losses in late trade to end marginally higher, led by index heavyweight Reliance Industries, even as investors stayed cautious in anticipation of company earnings beginning next week.
The euro hit 16-month lows against the dollar and sterling and hovered near an 11-year low versus the yen, with further declines expected as worries grow about a worsening euro zone debt crisis and sovereign funding pressures.
One-month offshore non-deliverable forward contracts were quoted at 53.02, indicating more weakness in the short-term in the onshore spot rate.
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 were all around 52.96, on total volume of $3.04 billion.
