The rupee reversed its early losses to close stronger against the dollar on Monday in thin trade, aided by custodial flows and dollar sales by software exporters.
Traders expect the rupee to continue to be supported in the last week of the year, potentially trading in a 54.20 to 54.60 range, on the back of inflows into local stocks and debt, along with continued dollar sales by exporters.
"Capital flows will be there, which will prop the rupee. There will be more equity flows and investments in debt," said N.S. Venkatesh, treasurer at IDBI Bank.
The partially convertible rupee closed at 54.95/96 per dollar versus its previous close of 55.06/07, after touching a low of 55.21 in early trade on oil-related buying.
Still, traders warned against expecting strong gains in the rupee in the near term, given the continued uncertainty over the U.S. "fiscal cliff".
Month-end dollar demand from oil and gold importers is also likely to cap the rupee's gain.
Foreign exchange markets will be closed on Tuesday for Christmas.
In the offshore non-deliverable forward market, the one-month contract was at 55.25 while the three-month was at 55.79.
In the currency futures market, the most-traded near-term dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange closed at around 54.99 with a total traded volume of $3.86 billion.