The rupee rallied against the dollar on Friday, tracking robust gains in domestic stocks and global risk assets on optimism major central banks will step in to counter any adverse impact from Sunday's Greek elections.
Hopes the Reserve Bank of India will cut interest rates on Monday to kickstart domestic growth also supported the rupee, since waning confidence on the economy had been a major factor behind last month's falls to a record low by the local unit.
The local unit rose 0.1 percent against the dollar for the week, gaining for a second consecutive week, though the outlook for the currency still remains weak.
"Rupee is likely to take cues from the outcome of the Greece election," said Vikas Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
The partially convertible rupee closed at 55.39/40 per dollar as per SBI data, much stronger than its Thursday close of 55.80/81.
The BSE Sensex rose 1.6 percent, mirroring gains in regional markets.
Analysts are seeing a near-term bottom for the rupee, which last month hit a series of record lows against the dollar.
Westpac said it expects USD/INR to fall further in the near-term, even as "significant headwinds" remain for the currency, including a "large" current account deficit, doubts about foreign direct investment inflows, and "lack of policy reform."
"Still, in the near term, if risk aversion can fall further/stabilise from here, we do see scope for USD/INR to correct lower," wrote the bank
However, NDFs are still pricing in further weakness ahead. The 1-month NDF was last trading at 55.68, while the three-month was at 56.43.
Global risk factors will be key to the rupee's outlook, as Greek elections on Sunday will be followed by a Federal Reserve meeting that ends on Wednesday in which the U.S. central bank may opt for further U.S. monetary stimulus measures.
Absent signs of policy reforms from the government, traders say the rupee could benefit if the RBI cuts rates on Monday, which would boost inflows into stocks and potentially reduce the pessimism about the economic outlook.
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 ended around 55.6175 on a total volume of $2.4 billion.
