The Indian rupee strengthened on Wednesday as a global risk rally boosted Asian currencies and shares, but persistent dollar demand from oil firms prevented sharper gains.
European stock markets rose to their highest since the 2008 financial crisis on Wednesday, while the Dow Jones Industrial Average hit a closing record high on Tuesday as central banks in the United States, Europe and Japan are expected to keep accommodative monetary policies.
Traders said the broad risk rally helped spark demand for the rupee from foreign funds looking to invest in Indian stocks, with the main share index closing up 0.6 percent.
However, domestically, analysts saw few supportive factors for the rupee, given weakening economic growth and persistent concerns about India's current account and fiscal deficits.
"The near-term direction for the rupee is very uncertain and largely dependant on the global risk sentiment," said Samir Lodha, managing director at QuantArt Market Solutions.
"There are inherent fragilities in INR like high current account and fiscal deficits, dependence on capital inflows, inflation and low growth. So INR appreciation is unlikely to be sustained," he added.
The partially convertible rupee closed at 54.7150/7250 per dollar versus its previous close of 54.92/93. The unit moved in a wide range of 54.6150 to 54.8850 during the session.
Investors are growing hopeful that the Reserve Bank of India may cut interest rates at its policy review on March 19.
India will unveil industrial output and inflation data next week, which will be critical indicators ahead of that decision.
Technically, the immediate support for the USD/INR is at 54.55, or the 38.2 percent Fibonacci retracement of the move from the low of 53.59 on Feb. 28 to 55.15 on March 4. Below that, there is stronger support in the 54.35-40 zone, traders said.
In the offshore non-deliverable forwards, the one-month contract was at 55.14 while the three-month was at 55.79.
In the currency futures market, the most-traded near-term dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.99 with a total traded volume of $4.92 billion.