The rupee gained in a lacklustre trading session on Monday, helped by gains in most regional shares and currencies, with traders remaining hopeful of at least a 25 basis point cut in interest rates by the central bank on May 3.
Almost all Asian currencies gained against the dollar while shares inched higher as investors counted on easy money from central banks in the euro zone and United States to offset the risk of further disappointment from global economic data.
Domestic investors will continue to focus on the upcoming annual monetary policy statement of the central bank on Friday which, along with the rate decision, will be key in setting near-term direction.
The RBI is likely to cut interest rates for a third time this year by 25 basis points, drawing comfort from a fall in inflation as it seeks to help lift the economy from its lowest growth in a decade, according to a Reuters poll.
"There was nothing much to excite the market today. There was some selling by state-run banks but nothing major," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
"I think the market (rupee) will consolidate between 54.00 and 54.80 till the policy. Euro and other majors are also trading in a tight band," he added.
The partially convertible rupee closed at 54.23/24 per dollar compared with 54.3750/3850 on Friday after moving in a tight 54.21 to 54.3850 range.
Domestic shares closed near their highest level in a month led by gains in Hindustan Unilever Ltd after the country's largest consumer goods maker beat market forecasts with a 15 percent increase in quarterly net profit.
Traders will continue to monitor share moves for cues on the direction of fund flows which are key to the rupee's fortunes. So far in 2013, foreign funds have bought shares worth more than $11 billion, helping the rupee gain over 1.3 percent.
In the offshore non-deliverable forwards, the one-month contract was at 54.43, while the three month was at 55.01.
In the currency futures market, the most-traded near-month dollar/rupee contract on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 54.41, with a total traded volume of $3.04 billion.