Rupee rose for a third session on Thursday, marking its sixth rise in seven days, as the decision of a key ally to support the government on the retail FDI issue in the upper house is likely to help the government win the vote.
On Wednesday, India's fragile ruling coalition won a vote in the lower house on allowing foreign supermarkets to operate in the country, in a key test of support for Prime Minister Manmohan Singh and his flagship economic reform.
"The win in the lower house was already mostly discounted by the market but the upper house win helped the rupee break the 54.25 level. The overall target now is 53.20," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with Andhra Bank.
Traders said the rupee moved in a wide 54.04 to 54.5775 band with dollar demand from oil and gold importers pushing it lower and prompting exporters to step in and sell the greenback, thus, limiting a sharper fall.
The partially convertible rupee closed at 54.1350/1450 per dollar, 0.75 percent stronger than its close of 54.54/55 on Wednesday. The unit rose as high as 54.04, its strongest since Nov. 7.
Sentiment toward the Indian rupee improved over the past two weeks and net short positions on the unit fell by over two-thirds, a Reuters forex positioning poll on Thursday showed.
Traders said a recovery in the domestic share market also helped sentiment for the rupee in the second half. Indian shares gained 0.5 percent, its third consecutive rise.
Rupee could rise to 52 per dollar by the end of 2013 and is Credit Agricole's top pick among the emerging markets, it said in a note earlier in the day.
The government's win in the lower house would continue to help the rupee despite questions on whether the reform would be approved by the upper house and concerns about its implementation.
"The government's victory is a good sign of its ability to push through other reforms," Credit Agricole said.
In the offshore non-deliverable forwards, the one-month contract was at 54.42 while the three-month was at 54.94.
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 54.2850 with a total traded volume of $6.30 billion.