The rupee ended higher for the second straight session on Wednesday after trading in a narrow range, on dollar sales by some foreign banks, although a retreat in the euro and a fall in domestic equities capped gains.
Dollar demand from oil importers, the biggest buyers of the greenback in the domestic foreign exchange market, also tempered the rupee's rise, traders said.
The rupee ended at 52.95/96 to the dollar, 0.5 percent stronger than its previous close of 53.21/22 after moving in a band of 52.91 to 53.20 in the session.
2012 has just started and trading has not gathered full momentum in global markets. Also, there is still no clarity on economic outlook of the euro zone, so rupee is likely to stay in a narrow band, said Naveen Raghuvanshi, associate vice president of foreign exchange trading at the Development Credit Bank.
Volumes in the dollar-rupee market remained low after curbs imposed by the Reserve Bank of India on banks' trading limits on December 15 to curb speculation and support the currency, which had then hit a record low of 54.30, traders said.
The USD/INR pair is expected to trade relatively range bound around 52.80-53.50. The prospect of strong RBI intervention at around the 53.50 levels should cap further uptrend in the pair in the near term, said HDFC Bank in a research note.
Chief Economic Adviser Kaushik Basu told Reuters that the government favours a hands off approach on the rupee exchange rate unless there are sudden fluctuations.
Nerves ahead of a German debt auction helped put European stock markets in negative territory and halted a surge for the euro after its biggest one-day gain in nearly two months.
Markets are wary because a similar sale in November did not receive enough bids to cover the amount offered, the first sign the crisis could even trouble the currency area's most successful economy.
One-month offshore non-deliverable forward contracts were quoted at 53.27 rupees, indicating some more short-term weakness 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 53.30, with the total volume at $3.45 billion.