The rupee rose on Tuesday as foreign fund inflows into stocks remain strong after the government fast-tracked fiscal and economic reforms, but renewed uncertainty in the euro zone capped broader gains.
Foreign investors have pumped in 116.2 billion rupees into domestic equities after recent measures including opening up the multi-brand retail sector and raising diesel prices.
However, absent any additional action from the government, investors could return their focus to the global risk environment, analysts said.
The euro fell on Tuesday -- approaching its 200 day moving average at $1.2827 -- on a media report that Germany's Bundesbank and the European Central Bank were getting lawyers to check the legality of the ECB's new bond buying programme.
"The sentiment-driven rise in the rupee is over. Going forward, the market will look at global events like the developments in Spain," said Abhishek Goenka, chief executive at India Forex Advisors.
The partially convertible rupee strengthened to 53.36/37 to the dollar from Monday's close of 53.47/48.
Early in the session, the rupee had fallen to a session low of 53.63, with dealers reporting over $900 million in dollar outflows, which they attributed to Cairn Energy's stake sale in its former Indian unit.
Cairn Energy Plc
On top of global risk developments, traders will also eye any additional action from the government.
However, despite the recent slew of reforms, analysts expect India to post a fiscal deficit of 5.8 percent, wider than its target of 5.1 percent.
Concerns about India's fiscal fundamentals, reflected in a current account that hit a record deficit in the quarter ended in March, had been a key factor behind the rupee's fall to a record of 57.32 in late June.
USD/INR 1-month non-deliverable forwards were last trading at 53.49.
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 53.36 with a total traded volume of around $6.7 billion.