Update at 17:20hrs: Rupee ends at fresh 7-week high at 54.38 Vs 55.44 (Monday's close)
The rupee rose to a one-and-a-half-month high on Tuesday as custodian banks sold dollars that could be funnelled into domestic shares or debt investments, following improved foreign investor sentiment.
The government last week increased foreign investor limits in government debt by $5 billion to $20 billion and the increased limits will be auctioned by the stock market regulator on Wednesday.
Portfolio investors too have turned bullish after the Indian government released draft rules last week and said the general anti avoidance rules, or GAAR, would not apply retroactively, a big concern for such investors.
Foreign investors were net buyers of Rs 591 crore worth of shares on Monday, provisional NSE data showed.
The Sensex was trading up 0.4 percent.
"Heard some inflows for debt auctions, NDF unwinding and stop-losses, all are helping the rupee," said Vikas Babu Chittiprolu, a foreign exchange dealer with Andhra Bank.
"If the current momentum sustains then the rupee can rise to 54.60 levels later in the day," he added.
However, not all market participants were certain the inflows were for the debt auctions as interest in the auction is expected to be low due to the three-year lock-in clause and also on account of July 4 being a U.S. holiday.
At 12:45 p.m, the partially convertible rupee was at 54.79/80 per dollar, after hitting 54.75, its strongest level since May 22. The rupee had closed at 55.43/44 on Monday.
The one-month offshore non-deliverable forward contracts were quoted at 55.12 per dollar, as compared to 55.75 at close on Monday.
Traders expect dollar inflows to continue helping rupee in the near-term as recent government measures have boosted sentiment for foreign fund inflows.
The rupee has staged a smart recovery from its record low of 57.32, hit on June 22. The unit, however, is still down over 11 percent from its 2012 high, reached in early February.
Traders said exporters were also major sellers of dollars after the rupee broke past the 54.85 mark.
"There was major panic among exporters, which helped rupee further gain. The absence of much oil demand is also aiding," a senior dealer with a state-run bank said.