The rupee on Tuesday reversed its four-day string of losses by gaining 53 paise to close at 55.39 as dollar supply outstripped demand in view of the US currency's weakness overseas as EU leaders agreed on terms for a bailout of Spanish banks.
The rupee resumed slightly higher at 55.90 per dollar as against Monday's closing level of 55.92 per dollar at the Interbank Foreign Exchange (Forex) market on weak Asian markets after Chinese import growth slowed in June.
However, the rupee changed track and shot up to day's high of 55.33 per dollar in tune with the surge in equity markets triggered by Eurozone finance ministers ratifying a deal to aid ailing Spanish banks.
The dollar's weakness against the 17-nation euro, which steadied at USD 1.2313 a day after striking its lowest point in two years, boosted the sentiment in favour of the rupee.
Foreign institutional investors who bought stocks worth Rs 606 crore (Rs 6.06 billion) on Tuesday, as per provisional data, also supported the rupee's rise as the currency ended at 55.39, clocking a gain of 53 paise or nearly 1 per cent.
The Indian stock market benchmark Sensex ended higher by 226 points or 1.30 per cent to four-month high.
Forex dealers said banks and exporters sold dollars after it weakened in international markets.
"The biggest positive which helped the rupee gain over 50 paise today was the Eurozone agreeing on the terms for bailout of Spanish banks. The Pound appreciated against the dollar. . . FII money also came in," said N S Venkatesh, Head of Treasury, IDBI Bank.
Experts said if Euro continues to trade strong against the dollar, rupee will consolidate.
"I think if the Euro continues to trade in the 1.18 to 1.23 range to the dollar as is the expectation, we should see rupee consolidate in the 53-55 range a dollar in the short term," said Moses Harding, Head of ALCO and Economic and Market Research, IndusInd Bank [ Get Quote ].
According to Pramit Brahmbhatt, CEO, Alpari Financial Services (India [ Images ]), larger FII participation in Indian stocks has helped the rupee.
"The FIIs has been finding the valuations attractive for parking their investments in India as the bailout of Spain and better than expected manufacturing numbers from Germany [ Images ] triggered risk on trades in global markets," he said.
Some also believe, Tuesday's 53 paise upmove is linked to hopes of better-than-expected IIP data.
"Rupee closed stronger against the dollar after the market was seen positive on expectations of positive Index of Industrial Production figures on July 12," said Abhishek Goenka, Founder & CEO, India Forex Advisors.
The premium for the forward dollar declined due to fresh receivings by exporters.
The benchmark six-month forward dollar premium payable in December fell back to 170-172 paise from Monday's close of 174-176 paise.
The premium for far-forward contracts maturing in June also down at 310-312 paise from 317-319 paise previously.
The RBI fixed the reference rate for the US dollar at 55.8055 and for euro at 68.5845.
The rupee rebounded against the pound sterling to end at 86.01 from Monday's closing level of 86.63.
The local currency also gained strength to end at 68.17 per euro from 68.79 previously.
It recovered against the Japanese yen to settle at 69.74 per 100 yen from last close of 70.31.