The rupee swayed in two-way trade on Wednesday before settling higher, helped by gains in euro and foreign fund related selling, with the currency drawing comfort from the Reserve Bank of India's move to ease exporters' access to forex market.
Foreign fund inflows continued to pour into India's equity markets in January, totalling nearly $3 billion at last count, with the country's shares hovering at two-year highs.
The rupee has been a direct beneficiary of the inflows, becoming the second biggest gainer so far in 2013 among Asian currencies tracked by Reuters after the Thai baht.
The fact that the RBI has largely stayed away from the currency markets, unlike in other Asian markets that have seen intervention in recent days, has also assured investors about the Reserve Bank of India's comfort with the currency levels.
Late Tuesday, the central bank allowed exporters to access the foreign exchange market without having to first exhaust funds in their foreign currency accounts, reversing a previous restriction imposed when the rupee was plummeting to life lows.
"What it means is the RBI's comfort on rupee. RBI's comfort will extend to market stake holders; analysts who were looking for run-away weakens in rupee into 58-60 need to get to the drawing board for review," said Moses Harding, head of asset-liability management at IndusInd Bank.
The partially convertible rupee closed at 53.665/6750 per dollar, stronger than its 53.81/82 close on Tuesday and snapping two sessions of losses. It traded in a 53.58-53.88 band in the session.
Finance Minister P. Chidambaram, who is meeting foreign investors in Singapore, has reiterated his commitment to push through further reforms in the budget session, Bank of America Merrill Lynch, which hosts the meeting, said in a note.
The euro continued to remain supported after a stronger-than-expected German economic sentiment survey on Tuesday.
In the offshore non-deliverable forwards, the one-month contract was at 53.89, while the three-month was at 54.45.
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 closed at around 53.62 with a total traded volume of $5.1 billion.