The rupee hit a two-month high on Tuesday, propelled by dollar inflows, and as strong China growth data and better-than-expected German business sentiment improved appetite for riskier assets globally.
The rupee rose 1.24 percent to end at 50.73/74 to the dollar, close to its intraday high of 50.70 -- a level last seen on November 17, according to Thomson Reuters data.
"Risk sentiment definitely improved and the dollar got sold for most part of the day," said Naveen Raghuvanshi, associate vice president of foreign exchange trading at Development Credit Bank.
He expects the rupee to rise up to 50.50 to the dollar in coming sessions and does not expect the central bank to buy dollars at current levels.
The government's decision to raise import duty on gold and silver earlier in the day helped the rupee rise as the move could help lower India's yawning trade deficit, traders said.
India is the biggest consumer of bullion and the dollar-quoted yellow metal along with crude oil forms a major chunk of the country's massive import bill which is typically higher than the exports.
According to data from the central bank on December 30, India's trade gap widened to $43.9 billion in the September quarter from $37 billion a year ago, while the current account deficit stood at $16.9 billion.
Intermittent dollar demand from domestic oil companies, the biggest buyers of the greenback checked rupee gains, traders said.
The euro rose for the first time in three trading sessions on Tuesday and Indian shares rallied 1.7 percent to their highest close in almost six weeks.
One-month offshore non-deliverable forward contracts were quoted at 51.09, indicating some weakness in the short term 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 50.93 on total volume of $7.11 billion.