The rupee recovered from early losses to trade higher on Friday after headline inflation surprised on the downside, raising hopes the central bank could start cutting interest rates as early as January.
India's wholesale price index rose a slower-than-expected 7.24 percent in November, less than the 7.6 percent estimated by a Reuters poll.
While most economists and market participants believe the central bank may hold rates steady on December 18., some are now expecting that it will infuse some liquidity in the form of a cash reserve ratio cut.
"The trending and expectation in headline inflation has improved, paving way for start of rate cut cycle in January-March 2013," said Moses Harding, head of asset liability management at IndusInd Bank.
"A CRR cut of 25 basis points is seen certain to maintain the positive feel," he said.
The government is trying to push through more reforms, approving steps on Thursday to speed up infrastructure projects and facilitate investment into the fertiliser sector.
The Sensex, which was trading flat before the data release, was up 0.4 percent.
The partially convertible rupee was at 54.32/33 per dollar at 12:30 p.m., 0.2 percent stronger than its Thursday close of 54.46/47. It had fallen to 54.60 in the session on importer demand for dollars.
The rupee is also on course for a second week of gains out of three.