The rupee rose for a second day on Thursday, largely helped by inflows related to a share sale and debt limit auction to foreigners, but the gains lacked conviction on continued political uncertainty.
The impasse in New Delhi was reflected in the continued weakness in shares, which fell for a fifth session to their lowest close in nearly four months, continuing to be a drag on the currency.
Dealers expect the rupee to remain under pressure as the political impasse over a key ally of the government pulling out is yet to be resolved, putting a question mark over the fate of future reforms.
However, the rupee was helped by rumoured inflows related to the government's share sale in Steel Authority of India, due Friday, which is set to garner about $290 million.
Inflows related to a successful sale of debt limits to foreigners also helped the rupee, dealers said.
India's auction of quotas allowing foreign investors to buy bonds attracted strong demand on Wednesday, easing some of the concerns about whether a recent sell-off in markets would reduce demand for domestic debt.
"Stocks have been jittery and edgy. The rupee has not fallen because of the inflows. Once the flows dry out, the undertone will be weak," said Param Sarma, chief executive at NSP Forex.
He expects the rupee to further weaken to 54.80 in April.
The partially convertible rupee closed at 54.2750/2850 per dollar versus 54.36/37 on Wednesday. It traded in a 54.1850-54.3350 band in the session.
In the offshore non-deliverable forwards, the one-month contract was at 54.73 while the three-month was at 55.35.
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 closed at around 54.34 with a total traded volume of $5.4 billion.