The rupee retreated from one-and-half month lows hit early in the session to close stronger on Tuesday boosted by corporate dollar sales and a mild recovery in the domestic stock markets.
The outlook for the rupee remains uncertain, as the currency continues to reel from the disappointment after the Reserve Bank of India kept interest rates on hold on October 30, signalling any monetary easing would not come until the January-March quarter.
That stance was confirmed by central bank governor Duvvuri Subbarao in an interview with Reuters on Monday, saying a rate cut at its next policy review in December was "highly improbable.
"Yesterday the break of 54.20 triggered stop-losses. Today morning the market felt USD/INR may move towards 55.00, but the rupee is getting tougher to predict," said Paresh Nayar, head of fixed income and forex trading at First Rand Bank.
"The impact of the U.S. elections may be felt on the euro and that would influence the rupee as well. But feel there will be good offers to sell between 54.50-54.80 levels," he added.
The partially convertible rupee closed at 54.43/44 per dollar as per the SBI closing rate, versus its previous close of 54.60/61.
Some drug makers and technology firms were spotted selling dollars in the second half of the session, helping the rupee recover from a more than one-and-half month low of 54.7850 touched earlier in the session, traders said.
Dollar sales from custodian banks were also seen, according to dealers. Foreign investors have bought more than $18 billion worth of shares so far in 2012.
Sensex, Nifty rose for a fifth consecutive session on Tuesday, as drug maker Cipla jumped after posting a surge in quarterly earnings, while State Bank of India rose on hopes for rising demand for loans in the holiday season.
Traders will closely monitor the U.S. election outcome for direction, while a parliamentary vote in Greece on budget and labour reforms on Wednesday will also be key.
Still, longer-term, the prospect of the rupee will likely be determined by the domestic fiscal and economic outlook.
Investors are watching how much in additional borrowing the government will announce for the fiscal year as it seeks to contain the fiscal deficit at 5.3 percent, wider than its initial target of 5.1 percent.
India's widening current account and fiscal deficits, and worries about growth, had been key factors that had sent the rupee to a record low in late June.
In the offshore non-deliverable forwards market, the one-month contract was at 54.77 while the three-month was at 55.35.
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 54.71 with a total traded volume of around $4.9 billion.