The rupee rose to a four-month high on Monday, boosted by record-high stock markets after the main opposition party, widely seen by investors as being more business friendly, swept three out of five key state elections held since last month.
The results were seen bolstering chances of the Hindu nationalist Bharatiya Janata Party (BJP) and its prime ministerial candidate Narendra Modi in general elections due by May, and were widely seen as a blow to the ruling Congress Party.
Continued gains in share markets could further lure foreign investors, with overseas net inflows into stocks already past $18 billion so far this year.
Still, traders urged caution given the continued prospect of the U.S. Federal Reserve soon tapering its monetary stimulus. The Reserve Bank of India could also raise interest rates for a third time this year next week, delivering a blow to shares.
Other lingering uncertainties include the volatility in oil prices, a big factor in India given the country imports most of its crude needs.
"The market is in euphoria over the BJP's victory," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
"The market is ignoring the potential outflows for Iran oil and strong U.S. data and a potential Fed taper on December 18. I am sceptical about selling dollars here but going by the force of the market we can sell dollars for the very near-term," he added.
The partially convertible rupee closed at 61.13/14 per dollar compared with 61.41/42 on Friday. The unit rose as high as 60.84 at open, its strongest since August 12.
Traders said good dollar demand from importers including oil companies was seen at stronger rupee levels, limiting any further gains.
Gains in other Asian currencies further aided the rupee.
Traders will now continue to monitor global cues for near-term direction.
In the offshore non-deliverable forwards, the one-month contract was at 61.46, while the three-month was at 62.32.