The rupee hit a near three-month high on Wednesday, clawing back all early losses, supported by robust dollar inflows, local share gains and a recovery in the euro.
The rupee closed at 49.2650/2750 per dollar, rebounding from the day's low of 49.66, gaining 0.4 percent from Tuesday's close of 49.44/45. It touched 49.2350, a level last seen November 8.
Rupee was supported by dollar inflows and the bounce back of the euro also aided the rupee in recovering the initial losses, said Hari Chandramgathan, a forex dealer with Federal Bank in Mumbai, who expects the currency to strengthen to 49.20 this week.
The euro pulled back from the day's low following data that showed Germany's manufacturing sector grew in January for the first time in four months.
The outlook on the rupee remains bullish as foreign investors are expected to park even more funds in Asia's third-largest economy, where growth is seen perking up as the central bank gradually returns to an accommodative monetary policy.
The sharp jump in HSBC manufacturing purchasing managers' index is considered as an indicator of the growth momentum and a positive for the local currency, traders said.
There is no direct correlation between PMI and the rupee. But since such data affects sentiment in markets, the currency only had to gain from it, said Uday Bhatt, senior manager of dealing at state-run UCO Bank.
Bhatt expects the currency to reach 49.00 in two to three weeks if it breaks past the 49.30 resistance convincingly.
The HSBC manufacturing purchasing managers' index (PMI), compiled by Markit, jumped to 57.5 from 54.2 in December.
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 BSE Sensex rebounded in late trade to post its highest close in 12 weeks, as metal producers and auto makers jumped, although investors were doubtful the rally could be sustained after a rise of nearly 12 percent so far this year.
The one-month offshore non-deliverable forward contracts were at 49.63.
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 49.59, on total volume of $4.47 billion.