The rupee touched a two-and-a-half month high on Friday, aided by firm local shares, as demand for riskier assets was spurred by hopes Greece will soon reach an agreement on restructuring its debt.
At 10:15 a.m., the rupee was at 49.72/73 to the dollar, after touching 49.65, its highest since November 9, and firmer than 50.09/10 at close on Wednesday. The market was closed on Thursday for a local holiday.
"I expect the bullishness in euro as well as in stocks to continue for some time, and rupee can test 49.00/05 level," said Hari Chandramgathan, a forex dealer with Federal Bank in Mumbai.
The euro held onto most recent hefty gains against the dollar on Friday, after hitting a five-week high, as the Fed's pledge to keep rates near zero for the next three years encouraged carry trades funded in dollars.
The BSE Sensex rose 1 per cent in early trades, extending gains to a sixth consecutive session, on rising foreign fund investments.
Foreign institutional investors have bought Indian shares worth $1.56 billion so far in January, and invested $3.39 billion in debt.
Traders said developments in Greece would provide directional cues and influence dollar inflows into India.
Greece and its private creditors made progress on Thursday in talks on restructuring its debt, both sides said, and they will continue negotiating on Friday with the aim of sealing an agreement within a few days.
Federal Reserve Chairman Ben Bernanke said on Wednesday the US central bank was ready to offer the economy additional stimulus after it announced it would likely keep interest rates near zero until at least late 2014.
One-month offshore non-deliverable forward contracts were at 50.10, 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 were all around 49.7, on total volumes of $1.8 billion.