The rupee on Thursday strengthened by 30 paise to end at two-week high of 54.39 on persistent capital inflows and dollar sales following government's decision to virtually deregulate diesel prices in its continuing economic reform agenda.
At the Interbank Foreign Exchange market, the domestic unit resumed slightly lower at 54.73 and immediately touched a low of 54.78 on the back of initial hesitancy in local stocks.
However, a smart recovery in equities after the morning session on account of rise in refinery stocks helped the rupee to bounce back to a one-month high of 54.22, a level not seen since intra-day high of 54.10 on December 13, 2012.
With FIIs supporting the rupee with nearly Rs 600 crore (Rs 6-billion) fund infusion in stocks today, the domestic currency closed at 54.39, registering a net rise of 30 paise or 0.55 per cent.
In the previous two days, it had fallen by 20 paise or 0.37 per cent.
"The rupee closed at its two week high against the US dollar after the government announced the deregulation of the diesel prices.
"This signals that there would be regular hike in the diesel
The dollar index was down by 0.20 per cent against a basket of six major global currencies.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said: "Rupee strengthened sharply after government allowed the Oil marketing companies to hike diesel prices in a periodical manner. . .The policy action from government has no doubt eased the pressure on fiscal deficit but will strengthen the RBI's status quo stance on rate cut policy."
Meanwhile, the premium for the forward dollar reacted downwards on fresh receipts by exporters.
The benchmark six-month forward dollar premium payable in June fell back to 161-163 paise from Wednesday's close of 167-1/2-169 paise.
Far-forward contracts maturing in December also dropped to 317-319 paise from 326-328 paise.
The RBI has fixed the reference rate for the US dollar at 54.6428 and for euro at 72.6545.
The rupee firmed up against the pound sterling to 87.17 from overnight close of 87.70 and recovered sharply against the Japanese yen to 60.87 per 100 yen from 62.04.
The rupee, however, improved further against the euro to 72.61 from previous close of 72.80.