The rupee rose by 30 paise to close at a nearly two-week high of 74.36 against the US dollar on Wednesday, extending its gains for a third day on the back of a strong rally in domestic equities.
At the interbank forex market, the local unit opened at 74.49 against the greenback and witnessed an intra-day high of 74.29 and a low of 74.50.
It finally ended at 74.36 against the American currency, registering a rise of 30 paise over its previous closing. On Tuesday, the rupee had settled at 74.66 against the American currency. This is the third straight session of gain for the rupee, during which it appreciated by 65 paise.
"Indian Rupee appreciated on the back rise in risk appetite in domestic markets. However, sharp gains were prevented on strong dollar and continued FII outflows," said Saif Mukadam, Research Analyst, Sharekhan by BNP Paribas.
Further, concerns over rising COVID-19 cases in India and lockdown restriction in some states weighed on investor sentiment and capped the gains for the local unit, Mukadam said.
Additionally, traders remained cautious ahead of US Federal Reserve monetary policy outcome and US President Joe Biden Speech, he said.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.14 per cent to 91.03.
Brent crude futures, the global oil benchmark, rose 0.18 per cent to USD 66.54 per barrel.
On the domestic equity market front, the BSE Sensex ended 789.70 points or 1.61 per cent higher at 49,733.84, while the broader NSE Nifty advanced 211.50 points or 1.44 per cent to 14,864.55.
Foreign institutional investors were net sellers in the capital market on Tuesday as they sold shares worth Rs 1,454.75 crore, according to the exchange data.
"The Indian Rupee appreciated against the US Dollar supported by the strength in local equities and foreign fund inflows," said Sriram Iyer Senior Research Analyst at Reliance Securities.
Hopes that the second COVID-19 wave in the country will peak by the next month and dollar selling by foreign banks also aided sentiments, Iyer said.
According to Dilip Parmar, Research Analyst, HDFC Securities, Indian rupee outperformed among Asian currencies following stronger domestic equities.
The focus will remain on Federal Open Market Committee (FOMC) outcomes and stance which directs the trend of financial markets, Parmar said.
"Rupee traded strongly on the back of increased fund flows continues into capital market mainly in the financial sector, helping rupee scale pass 74.50 and towards 74.25," Jateen Trivedi, Senior Research Analyst at LKP Securities said.
"Going ahead, the rupee will be in range in 74.00-74.75 incoming sessions,” he added.
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