The rupee gained for a second straight week on Friday on signs European efforts to contain the region's debt crisis were working, boosting sentiment for riskier emerging-market assets.
The rupee gained 0.7 percent this week to close at 48.9350/9450 to the dollar, its highest since February 7. It ended at 49.19/20 on Thursday.
"There is some slight bounce with much better sentiment and stability in Europe," said Paresh Nayar, head of fixed income and forex trading at First Rand Bank. "Foreign investor portfolio inflows and dollar weakness have helped rupee to gain this week."
The euro hit a fresh 2-1/2-month high on Friday, continuing gains after improved German business sentiment data.
Strong foreign inflows have helped the rupee gain around 8 percent this year after its 16 percent drop in 2011. Foreign funds have invested around $9 billion in Indian equities and debt so far in 2012, according to the Securities and Exchange Board of India.
Dollar demand from local oil refiners weighed on the rupee, with global oil prices rising as concern over cuts in Iranian supply offset worries that high oil prices could restrain demand.
India imports 80 percent of its oil needs, of which around 12 percent come from Iran, adding to domestic oil companies' dollar needs.
Traders said the rupee's rally since mid-December was driven by RBI strictures on foreign exchange operations, along with strong foreign investor flows into debt and equity market.
Macroeconomic dynamics continue to be negative, dominated by slower growth, a widening trade gap and high fiscal deficit.
"Rupee strength has been driven by global liquidity rather than convincing signs of Indian recovery," said Priyanka Kishore, a forex strategist at Standard Chartered Bank.
"Improvement in India's trade deficit stalled in January and may be reversed on high oil," she said in a note.
J. Moses Harding, head of the asset-liabilities committee at IndusInd Bank, sees near-term stability in the rupee in a range of 48.85-49.80 to the dollar and expects it to further strengthen to 48.65-48.50.
One-month offshore non-deliverable forward contracts were at 48.92.
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 ended at around 48.96, on a total volume of $5.5 billion.