The rupee reversed all early losses on Monday to end higher stoked by dollar inflows and boosted by a rebound in the local share market.
The rupee settled at 51.36/37 to the dollar, 0.3 percent up from Friday's close of 51.5350/5450, after dipping to 51.79 in early trades.
There was initial selling pressure on the rupee due to Standard & Poor's action on euro zone, said Ashish Barua, a senior forex dealer with IndusInd Bank.
But dollar inflows with some foreign banks helped rupee recover and we should expect the currency to move in 51.25 to 52.00 band.
A rebound in the local equities led by auto and software stocks after data showed headline inflation in December slowed sharply also aided the rupee, traders said.
The outlook for the rupee is mixed as the expected growth boosting measures from policymakers are seen supporting equities and the currency, but weak macroeconomic fundamentals are seen weighing.
The rupee shrugged off news of an acceleration in India's exports in December as it was largely along expected lines, traders said.
We are, however, skeptical that the rally in the rupee can extend and would refrain from chasing the recent move lower in USD/INR, said Dennis Tan, strategist for Deutsche Bank in Singapore.
Risks from the unresolved euro debt crisis and the possibility of weak capital inflows into Asia's third-largest economy are factors which could limit the rupee's rise, Tan said in the research note on Monday.
The rupee, which had hit a record low of 54.30 on December 15, posted its biggest weekly gain in more than two months last week rising 2.29 percent.
The euro held near a 17-month low against the dollar and hit a 11-year low versus the yen on Monday on concern a Standard & Poor's downgrade of euro zone states and a Greek debt stand-off would aggravate the region's debt crisis.
As nine euro zone countries, including France, had their ratings cut, talks between Greece and private creditors on a debt swap deal broke down, raising the risk of a messy Greek default and dousing last week's glimmers of optimism.
One-month offshore non-deliverable forward contracts were quoted at 51.76, indicating some weakness in the short-term in the onshore spot rate.
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 ended around 51.59 on total volume of $4.17 billion.