The rupee rose on Wednesday, snapping a three-day losing streak, as a steadier euro helped, but traders remained cautious ahead of key global events and the Reserve Bank of India's policy meeting next week.
The rupee has been in a consolidation phase since it hit a record low of 56.52 to the dollar on May 31, but few traders are willing to bet on a sustained recovery.
India reports headline inflation for May on Thursday, which will help adjust expectations ahead of the Reserve Bank of India policy meeting on Monday. Bond yields have slumped and stocks have rallied in anticipation of a cut in the repo rate.
Though the wholesale price index is expected to rise to 7.60%, its highest this year, traders are focused on core inflation, which would cement expectations for a rate cut should it come at 5% or below.
Growth-boosting measures from the RBI could help support the rupee by boosting inflows into stocks, as well as raising badly dented confidence in India's economic outlook, though some analysts warned against excessive optimism.
"While a pro-growth monetary policy outcome may ease some of the pessimism surrounding the INR, a 25 basis points rate cut is largely priced in and is unlikely to have any discernable impact," Standard Chartered Bank said in a note.
The partially convertible rupee closed at 55.68/69 per dollar as per SBI data, stronger than Tuesday's close of 55.80/81.
A steadier euro has helped the rupee gain some ground, though volumes have been low.
In the near-term, the rupee is also likely to be influenced by global risk events, most prominently the Greek elections this weekend and the Federal Reserve meeting next week.
"The euro has been the main factor driving the rupee. There was also not much dollar demand in the later session," said Paresh Nayar, head of fixed income and forex at First Rand Bank in Mumbai.
He expects the rupee to trade in a 55-56.20 band to the dollar for the rest of week.
The one-month offshore non-deliverable forward contracts were at 56.01 while the three-month was 56.79.
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 55.79 on a total volume of $3.5 billion.
