The Indian rupee rose on Thursday, snapping three sessions of losses, on bunched up dollar sales by foreign banks after public holidays and inflows from a state-run utility.
The rupee was also helped by a slight recovery in the euro which halted a five-day losing streak, although the common currency looked vulnerable to concerns about slowing growth and uncertainty over aid for Greece and Spain.
However, the outlook for the rupee remains weak. The local unit fell in early session to as low as 55.08, close to its two month low of 55.12 hit on Monday, as concerns about slowing economic growth weigh on the currency.
Data on Wednesday showing headline inflation unexpectedly easing to 7.45 percent in October helped improve the mood somewhat, though it was still seen high enough to be a headache for policymakers struggling to balance the need for growth with taming prices.
"The euro zone worries will guide the dollar globally. I do not expect anything major on the domestic front. The current account deficit and IIP were dampeners but inflation was a pleasant surprise," said Hari Chandramgathan, a senior foreign exchange dealer with Federal Bank, referring to industrial output.
"The rupee can touch 55.20 in the near term. I expect the pair to hold in a 54.50 to 55.20 range next week."
The partially convertible rupee ended stronger at 54.70/71 to a dollar as against its Monday close of 54.88/89 to a dollar. It traded in a 55.08-54.68 band in the session.
Indian forex markets were closed on Tuesday and Wednesday for Diwali holidays, the festival of lights celebrated all over the country.
Dealers cited dollar sales by foreign banks as well about $100 million in inflows from a state-run utility as key reasons behind the rupee's recovery.
In the offshore non-deliverable fowards segment, the one-month contract was at 54.97 while the three-month contract was at 55.54.
In the currency futures market, the most traded near-month dollar/rupee on the National Stock Exchange and the MCX-SX closed around 54.92 with total traded volume of $3.54 billion.