The rupee fell on Friday, snapping three sessions of gains, dragged by the euro's weakness, but dealers said that the local currency may gain if the government can push through more reforms in parliament next week.
The government expectedly won the vote on foreign investment in retail in the Rajya Sabha on Friday. Bolstered by the win, the government said it will bring more financial sector reform bills next week in parliament.
Dealers expect the rupee to gain more if the government pushes through reform proposals like allowing foreign direct investment in the pension sector and raising the limit for insurance.
However, the twin deficits, on the fiscal and current account, may continue to be a drag.
"The positives from reforms have been factored in the rupee rally into 54.10, but fundamental concerns from the widening trade gap and high dependence on short-term capital flows will weigh against it," said Moses Harding, head of asset-liability management at IndusInd Bank.
"There will be bunched-up demand into month/year end. FIIs (foreign institutional investors) also may be in exit mode ahead of the financial year-end, gaining from both underlying equity assets and the exchange rate."
The partially convertible rupee closed at 54.47/48 per dollar, 0.6 percent weaker than its close of 54.1350/1450 on Thursday. For the week, the rupee fell 0.4 percent, a fifth week of fall in six.
Sentiment toward the rupee improved over the past two weeks and net short positions on the unit fell by over two-thirds, a Reuters forex positioning poll on Thursday showed.
The euro fell to a nine-day low against the dollar on Friday after the Bundesbank slashed its growth outlook for Germany, with the single currency at risk of more losses on prospects of a euro zone rate cut.
In the offshore non-deliverable forwards, the one-month contract was at 54.78, while the three-month was at 55.30.
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 54.71 with a total traded volume of $5.4 billion.