The rupee posted its fifth straight weekly gain on Friday, aided by a gush of foreign funds as investors bet on a monetary easing to boost growth in Asia's third-largest economy.
Foreign funds have bought $2.6 billion of Indian shares and $3.2 billion of debt so far this years, data from the Securities and Exchange Board of India showed.
"There was buying on euphoria that rate cuts are coming, that inflation is on a secular downturn," said Sailesh K Jha, Head of Asia Strategy at Skandinaviska Enskilda Banken in Singapore, who also noted a return of "risk-on sentiment".
Annual headline inflation, as measured by the wholesale price index, slowed to a two-year low of 7.47% in December, reflecting a sharp decline in food inflation, although manufactured product inflation edged up.
The rupee ended at 48.6850/6950 to the dollar, close to the day's high of 48.67, a level not seen since October 31. It closed at 49.15/16 on Thursday.
The stock market's rise of nearly 14% this year has kept up hopes of increased foreign fund inflows. The market rose 2.2% this week.
Recent measures by the Reserve Bank of India to curb corporate and interbank speculation, along with several steps to attract funds from non-resident Indians and foreign investors, have accelerated dollar inflows, supporting the rupee.
The rupee posted its largest monthly gain in at least 17 years in January, according to Thomson Reuters data.
The rupee's 7.45% gain in January followed a 16% drop in 2011, when it was Asia's worst performing currency. However, many traders do not expect the gains to hold.
"It looks to be overbought and is likely to see a correction," said Suresh Kumar Ramanathan, regional rates and FX strategist CIMB in Malaysia, who expects the rupee to be trading back below 51 to the dollar by the end of February.
"The dollar will remain strong and with Greece likely to miss its maturity payments in early march, the market will see risk aversion flows," Ramanathan said.
Traders said US jobs figures at 1330 GMT would be crucial in deciding the direction of the rupee next week as the data will offer clues on global growth.
One-month offshore non-deliverable forward contracts were at 48.68.
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 were all around 49.94, on total volume of $5.1 billion.