The rupee strengthened slightly against the dollar on Thursday after earlier hitting a three-and-a-half month high, while posting its first monthly gain in four on the back of heavy dollar inflows into the domestic equity and debt markets.
Foreign funds bought shares and bonds of more than $4 billion until the second-last day of the month, helping the rupee gain 3.3 percent, and easing concerns about India's current account deficit.
The strong inflows have come in a month in which the government announced additional fiscal and economic reforms, including allowing diesel prices to rise further and imposing duties on gold imports, shoring up confidence in the economy.
The RBI this week also delivered its first interest-rate cut in nine months, sparking more optimism about economic growth, although it was cautious on future monetary easing.
"I think there is a lot of scope for a further rally in the rupee, 53.35 was a crucial support and now the next support is closer to 53," said Naveen Raghuvanshi, associate vice-president with Development Credit Bank.
"Over the next fortnight, the rupee may touch 53 if not break it, as there will be lot of dollar demand emerging around that mark. Broadly, the rupee should hold in a 53.10 to 53.40 range tomorrow."
The partially convertible rupee closed at 53.2150/2250 per dollar versus its previous close of 53.30/31. It earlier hit 53.07, its strongest since October 18. The rupee posted its first monthly gain in four and is the best-performing currency in Asia so far in 2013.
Traders, however, said there was strong resistance seen due to residual month-end dollar demand from importers, while oil firms were also seen buying aggressively as current levels are attractive.
Domestic shares fell on Thursday, led by ICICI Bank, which was hit by profit-taking after beating forecasts with its quarterly earnings.
Investors are now focusing on the budget for the next fiscal year to be unveiled in late February. Finance Minister P. Chidambaram has promised to stick to the government's fiscal deficit targets.
The Indian government will shed 10 percent in Oil India through an auction on Friday, ahead of a stake sale in NTPC on February 7.
"The fireworks are likely to start tomorrow with respect to dollar inflows," Development Credit Bank's Raghuvanshi said.
India's fiscal deficit during the April-December period was 4.07 trillion rupees, or 78.8 percent of the budgeted full fiscal year 2012/13 target, government data showed on Thursday.
The possibility of India losing its investment grade credit rating has receded somewhat as a result of economic reforms by the government since last September, an analyst with rating agency Standard & Poor's told Reuters on Thursday.
In the non-deliverable forwards, the one-month contract was at 53.44, while the three-month was at 54.01.
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 53.4050 with total traded volume of $5.5 billion.