The rupee strengthened on Wednesday as oil-related dollar demand waned at the start of the month while custodian banks were spotted selling dollars in a session marked by caution ahead of the U.S. Federal Reserve meeting.
Data confirming India's trade deficit narrowed in June helped ease some of the concerns about the current account deficit that are weighing on the rupee, though the immediate impact on Wednesday was muted.
To build momentum for the rupee, investors would need to see fiscal measures from the government, including action to attract foreign investment, analysts said.
P. Chidambaram appointment on Tuesday as the finance minister was seen as encouraging, given his reformist image, but he will face a skeptical investment audience.
"It is the government as a whole which is responsible for the lack of reforms," said N.S.S. Mani, chief forex dealer at State Bank of Travancore.
"So though Mr. Chidambaram may initiate the process of reforms, whether or not it will be implemented, one has to wait and see. I'm not too confident and don't think the market is too hopeful either."
The partially convertible rupee closed at 55.47/48 per dollar, stronger than its close of 55.6450/6550 on Tuesday.
The unit moved in a wide band of 55.43 to 55.76 during the day.
Oil importers largely remained absent on Wednesday, following a traditional pattern in which they tend to accelerate their dollar purchases only towards the end of the month, closer to the time when they need to meet their commitments.
Traders also spotted around $300 million dollar sales by some custodian banks, most in the morning session.
The euro steadied ahead of the Federal Reserve meeting later in the day. Analysts expect the U.S. central bank to stop short of announcing aggressive measures to tackle a weak U.S. economy, but to signal its readiness to act.
Meanwhile, investors are gearing up for possible European Central Bank action on Thursday to tackle the region's debt crisis, but they are also mindful of the risk of disappointment.
The one-month offshore non-deliverable forward contracts were at 55.78, while the three-month was at 56.46.
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 55.79, with a total traded volume of around $3.4 billion.