The rupee hit a three-month high on Thursday, encouraged by gains in domestic equities, and after manufacturing data in China and Germany boosted investor appetite in high-yielding emerging market assets.
Factory activity in the United States, China and Germany grew in January, data released Thursday showed, raising hopes that the world economy is not deteriorating as seriously as feared before.
The rupee closed at 49.15/16, after touching 48.9425 -- its highest since November 1, according to Thomson Reuters data. It closed at 49.2650/2750 on Wednesday.
The euro rose against the dollar on Thursday after Chinese Premier Wen Jiabao said China was considering greater involvement in the EFSF euro zone rescue fund and its successor, the ESM, traders said.
I see more inflows into India, despite the sharp rise in equities and rupee, although the size may be moderate compared with January, a senior trader with a foreign bank said.
Traders expect the rupee to strengthen to 48.60 to the dollar in the near term.
The local currency posted its largest monthly gain in at least 17 years in January, according to Thomson Reuters data.
The rupee's 7.45 percent January gain followed a 16 percent drop in 2011 which made it Asia's worst performer for the year.
The 30-share BSE share index closed 131.27 points, or 0.76 percent, higher at 17,431.85 points, its third straight day of gains.
Expect sentiment on rupee to remain strong ahead of the budget, said A. Prasanna, economist at ICICI Securities, a primary dealership in Mumbai.
But lot of flows will depend on global risk appetite which is tied to developments in Europe, he said.
The outlook on the currency remains positive as economic momentum in Asia's third-largest economy is expected to stay strong with the central bank slowly returning to monetary easing, traders said.
Foreign funds have bought Indian shares worth $2.18 billion so far this year and invested $3.2 billion in debt, data from the Securities and Exchange Board of India showed.
The near absence of speculative trades in the local currency market was also helping the rupee, traders said.
The Reserve Bank of India slashed trading limits on market participants to curb speculation after the rupee slumped to a record low of 54.30 on December 15.
Intervention in the foreign exchange market needs to be a bit unpredictable, RBI Governor Duvvuri Subbarao said on Thursday.
The one-month offshore non-deliverable forward contracts were at 49.14.
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 49.44, on total volume of $5.7 billion.