The rupee rose for a fifth session in six on Wednesday as investors remained hopeful for a parliamentary approval to foreign direct investment in the multi-brand retail sector which will be put to vote in the lower house later in the day.
The government bowed to intense opposition pressure last week and agreed to a vote on its decision to let foreign supermarkets set up shop in India, taking a major step towards ending a deadlock that had paralysed the parliament for days.
Post the voting in the lower house, the reform will then be put to vote in the upper house on Thursday.
"Rupee gains were mostly sentiment driven today with the euro being stronger and on expectations of the parliament approving FDI in retail. Lesser oil demand also helped," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
"If FDI gets approved, 54.00 (level) should be broken," he added.
The euro hit a seven-week high against the dollar on Wednesday as efforts to tackle the debt crisis in Greece and subsiding concerns about Spain improved investor appetite for euro zone assets.
The partially convertible rupee closed at 54.54/55 per dollar versus its previous close of 54.68/69.
The BSE Sensex gained for the sixth time in seven sessions on hopes the government will muster a majority in the parliament on the crucial vote.
"I feel parliamentary approval is discounted to an extent. Today's vote may go through but upper house remains a challenge as per experts," said Paresh Nayar, head of fixed income and forex trading at First Rand Bank.
"The first support is at 54, but continuous improvement in sentiment and FII inflows may take INR towards 53 in few weeks. If the vote goes against the government, stocks will react negatively thereby impacting the rupee and once again, a move towards 56 may start," Nayar added.
In the offshore non-deliverable forwards market, the one-month was at 54.81 while the three-month was at 55.34.
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 54.7875 with a total traded volume of $4.29 billion.