The rupee gained on Friday, aided by foreign investors buying into local debt, though negative local shares and risk aversion globally may cap gains.
At 10:02 a.m. (0432 GMT), the partially convertible rupee was at 52.7850/7900 to the dollar, 0.4 percent stronger than Thursday's close of 52.98/99.
Traders said foreign institutional investors (FIIs) were buying Indian debt, resulting in dollar inflows in the local market.
The macro environment is negative, with shares and the euro down, but these flows are supporting the rupee, a trader with a state-run bank said.
In late November, Securities Exchange Board of India, the capital market regulator, auctioned the enhanced debt limit for foreign funds, which was oversubscribed.
FIIs are now utilising their limits and investing in debt, the trader said. The limits for investing in government bonds expire in mid-January.
Dollar selling by exporters and banks also supported the rupee, traders said, adding the Indian unit is likely to trade in a 52.65 to 53.05 range intraday.
Indian shares opened down 0.5 percent as investors were wary about sluggish quarterly earnings expected this month and on renewed concerns about the euro zone debt troubles.
The euro hovered near a 16-month low against the dollar and an 11-year low versus the Japanese yen on Friday, with further declines seen in store for the embattled single currency.
Traders said the outlook for the rupee in the near-term is weak, with India's large current account deficit and a weak global economy weighing.
We expect rupee to remain weak and average around 51 through 2012, with some pull back in second half, said analyst Tanvee Gupta Jain of Macquarie Capital Securites India.
While we expect RBI to continue intervening in the currency market to curb the volatility in rupee, the direction is unlikely to change, in our view, Jain said in a note.
One-month offshore non-deliverable forward contracts were quoted at 53.13, indicating more 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 were all around 52.97, on total volume of $505 million.