The rupee rose on Wednesday, touching an over two-week high at one point, on optimism the government will deliver a fiscally disciplined 2013/14 budget, attracting more foreign flows into the country.
Investors are also hopeful the government will unveil measures to boost investments on Thursday when Finance Minister P. Chidambaram presents the budget for the year starting in April.
The economic survey showed on Wednesday said India was likely to hit a fiscal deficit target of 5.3 GDP this year despite a significant shortfall in revenue, adding there would be further scope for monetary easing if the government continued with its fiscal consolidation plan.
"INR rose as expectations are for an investor friendly budget and not a voter friendly one. But there was oil and defence demand in the late session which pulled rupee off highs," said Uday Bhatt, a foreign exchange dealer with UCO Bank.
"I expect the rupee to hold in a 53.80 to 54.20 range until the budget announcement tomorrow," he added.
Chidambaram is due to start presenting the 2013/14 budget in parliament starting around 11 a.m. on Thursday.
The partially convertible rupee closed at 53.86/87 per dollar compared with its previous close of 54.09/10.
The unit rose as high as 53.63, its strongest since February 11, but retreated a tad on month-end dollar demand from oil companies and defence-related firms.
Traders said a rebound in shares from three-month lows in the previous session also helped, as recent blue chip underperformers rose on value buying.
Globally, risk assets recovered from Tuesday's losses after Federal Reserve Chairman Ben Bernanke defended the U.S. central bank's monetary stimulus, easing worries over a possible early retreat from bond purchases.
In the offshore non-deliverable forwards, the one-month contract was at 54.19 while the three-month was at 54.82.
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 closed at around 54.1750 with a total traded volume of $6.45 billion.