The Indian rupee strengthened for a fourth session in five on Tuesday as investor hopes for a parliamentary approval to foreign direct investment in multi-brand retail grew a day ahead of the impending vote.
The parliament began debate on FDI in multi-brand retail earlier in the day with both houses due to vote on the reform on Wednesday.
"If FDI in retail goes through, we may see 54 levels on the rupee or else we are likely to head below 55," said Uday Bhatt, a foreign exchange dealer with UCO Bank.
"If there is an increase in foreign institutional investment limit in government bonds as speculated, we will see a further upside," he added, predicting a 54.50 to 54.95 range for the rupee until the vote on Wednesday.
The government is considering a proposal to raise the ceiling on foreign investments in government and corporate bonds by $5 billion each, a senior finance ministry official said, as the country looks to increase vital capital flows.
The partially convertible rupee closed at 54.68/69 per dollar versus its previous close of 54.77/78.
Traders said heavy dollar demand from a technology firm in early trade had hurt the rupee, pushing it to the day's low of 54.96, but a decline in demand later in the session and improvement in domestic shares helped the rupee recover.
Some traders said the firm was Mphasis, an Indian IT services and back-office support provider and a unit of Hewlett-Packard Co, which had agreed to buy U.S.-based Digital Risk LLC, a mortgage management specialist, for $175 million on Monday.
Some dollar demand from oil firms, the largest buyers of the greenback in the domestic currency market, also hurt the rupee.
Indian shares edged higher, rising for the fifth day in the last six sessions, led by gains in Reliance Industries, on hopes the government will soon approve the company's investment plans for the KG-D6 block.
Foreign funds have bought more than $20 billion worth of domestic shares so far this year and bought debt worth more than $6 billion.
In the offshore non-deliverable forwards, the one-month contract was at 54.97, while the three-month contract was at 55.49.
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 $54.8975 with a total traded volume of $5.20 billion.