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The rupee gained 6 paise to settle at 72.96 against the US dollar on Tuesday tracking weak American currency and heavy buying in domestic equities.
Analysts said the rupee is trading in a narrow range as traders remained cautious ahead of the RBI monetary policy scheduled on Friday.
At the interbank forex market, the rupee opened on a flat note at 73.02, and gained ground to touch an intra-day high of 72.92. The local unit also touched a low of 73.05 during the day.
It finally finished at 72.96, higher by 6 paise over its last close. On Monday, the rupee had finished at 73.02 against the American currency.
The dollar index, which gauges the greenback's strength against a basket of six currencies, declined 0.06 per cent to 90.92.
On the domestic equity market front, the BSE Sensex ended 1,197.11 points or 2.46 per cent higher at 49,797.72, while the broader NSE Nifty advanced 366.25 points or 2.57 per cent to 14,647.85.
Foreign institutional investors were net buyers in the capital market as they purchased shares worth Rs 1,494.23 crore on Monday, according to exchange data.
Brent crude futures, the global oil benchmark, rose 1.46 per cent to USD 57.17 per barrel.
"Prospects of higher GDP growth is driving rupee higher. Worries on fiscal front following higher borrowings and recovery in the dollar index against major trading currencies are factors pushing the rupee lower," said Devarsh Vakil, Deputy Head of Retail Research.
Vakil further noted that the rupee is expected to consolidate in the range of 72.70 to 73.50 ahead of the RBI's MPC meeting scheduled on February 5. "The bias for the local currency remains bullish for the remainder of the week," he said.
According to Sriram Iyer, Senior Research Analyst at Reliance Securities, the rupee strengthened amid hopes that increased capital expenditure proposed in the union budget will boost risk appetite.
However, persistent concerns of further weakening of the fiscal deficit kept gains in check, Iyer noted.
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