The rupee rallied on Tuesday, snapping a four-session losing streak, buoyed by strong gains in local stocks and dollar sales by exporters.
Local stocks posted their highest close since mid-March, helped in part by data showing foreign institutional investors were net buyers of 2.5 billion rupees in Indian shares on Monday, for a preliminary total of 58.2 billion rupees for the month.
Traders also said heavy dollar sales were spotted from exporters, particularly from software services exporters as well as a large petrochemical company.
The strong recovery in the rupee comes after the rupee fell 2.8 percent over the previous four sessions as worries about the global economy pummelled risk assets worldwide.
"The stock markets are looking up and exporters came in and sold mid-session," said N.S. Venkatesh, treasury head at IDBI Bank.
He expects the rupee to trade in a 55.25-55.80 band to the dollar for the week.
The partially convertible rupee closed at 55.39/40 as per the SBI closing rate, up nearly 1 percent from its Monday's close of 55.92/93.
Global risk factors will continue to be key for the rupee's outlook.
The euro steadied near a two-year trough against the dollar and hit a five-week low versus the yen on Tuesday after a meeting of finance ministers offered no positive surprises while a German court hearing kept the market nervous.
Domestic data will also be important, in the lead up the Reserve Bank of India's policy decision on July 31. Concerns about India's current account and fiscal deficits and slowing growth had sent the rupee to a record low late last month.
India is set to announce May industrial output on Thursday, with a poll of analysts expecting growth to pick up to 1.8 percent from 0.1 percent in April.
The data will be followed by wholesale price inflation on Monday.
The one-month offshore non-deliverable forward contracts were quoted at 55.68 while the three-month were at 56.32.
In the currency futures market, the most traded near-month dollar-rupee contract on the National Stock Exchange, the United Stock Exchange and the MCX-SX all ended at around 55.5750. The total volume was at $4.4 billion.