The rupee rose on Friday to its highest level in over four months after the government cut a tax for overseas borrowing by local companies, giving them access to cheaper funds.
More broadly, the announcement was seen by investors as a signal of the government's commitment to continue implementing long-awaited reforms after tackling last week major measures such as raising diesel prices.
Although the reform drive cost the ruling coalition the support of key ally Trinamool Congress, investors were comforted after a key regional party, Samajwadi Party, said it would continue providing outside support to the government.
"The global liquidity is already positive for the rupee. I see the current measures will lead to a continued rupee rally," said Satyajit Kanjilal, chief executive at Forexserve.
He expects the rupee to rise to 50.80-51 levels to the dollar in the near-term, which would mark a remarkable recovery for a currency that just in late June had hit a record low of 57.32 to the dollar.
The partially convertible rupee ended at 53.45/46 to the dollar from its Thursday close of 54.385/395, securing a third consecutive week of gains with a 1.8 percent advance.
The rupee rose to an intraday high of 53.33, its highest since May 10.
Gains accelerated after Finance Minister P. Chidambaram announced the withholding tax on overseas borrowing by local companies will be reduced to 5 percent from 20 percent, in a move expected to increase fundraising abroad.
The moves were well received, as they come after recent action to attract foreign direct investment into a country that had a record high current account deficit as of the June quarter.
Dealers are hoping the government will push forward with more reforms including raising the foreign direct investment limits for foreign players in the insurance sector.
USD/INR 1-month non-deliverable forwards were last trading at 53.53.
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 53.485 with a total traded volume of around $9 billion.