The rupee snapped a four-day losing streak on Thursday, boosted by dollar sales from exporters and a late rebound in the domestic share markets which likely brought some foreign fund inflows.
Traders said the sell-off seen in the rupee over the last four days was a bit exaggerated thus prompting exporters to liquidate their dollar holdings starting 53.10 per dollar levels.
Investors will now closely scrutinise India's factory output due on Friday. India's industrial output likely grew a modest 1.1 percent annually in August after barely growing at all in July, indicating weak domestic and global demand, a Reuters poll showed.
"Stock markets turned positive bringing in some inflows while exporters also sold. Euro also gained a bit. I am now looking at around 52.50 levels," said Sudarshana Bhat, chief dealer with state-run Corporation Bank.
"Tomorrow's IIP numbers are also expected to be slightly positive, so that will also help the rupee. I broadly expect a 53.25-50 (range) to be the top for the pair while the lower side may be limited at 51.50 levels," Bhat added.
The partially convertible rupee closed at 52.6850/6950 per dollar, 0.7 percent stronger compared to its Wednesday's close of 53.0450/0550. The unit moved in a wide range of 52.63 to 53.16 during the session.
At the day's low, the rupee had lost around 2.7 percent of its value since its close last Thursday.
The Sensex rose as expectations for strong earnings sent Infosys and HDFC Bank higher a day ahead of their results.
The gains were expected to have led to dollar selling from custodian banks, while exporters were also spotted selling the greenback during the session.
Long positions in the Indian rupee shrank to about a third of the level two weeks ago, a Reuters survey of traders showed.
In the offshore non-deliverable forwards market, the most-traded one-month contract was around 52.85 while three-month was at 53.34.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and United Stock Exchange all closed at around 52.74 with a total traded volume at around $5.76 billion.