The Indian rupee rose on Tuesday after the central bank kept interest rates unchanged but signalled it could ease monetary policy by early next year, raising optimism about accelerating economic growth.
The Reserve Bank of India said it could cut interest rates "early next year" provided inflationary pressures do not re-appear and the government controls the fiscal deficit.
The rupee also benefited from stronger emerging Asian currencies on the back of dollar volatility and a rebound in crude oil prices from five-year lows.
Analysts said the rupee would likely remain under pressure given the broader strength in the dollar, although losses could be capped by domestic factors.
"The rupee would remain under pressure in the near term on global factors," said Anish Vyas, a currency analyst at Angel Broking in Mumbai.
"But a largish depreciation is unlikely because of continuous fund flows, moderation in inflation - and now a good chance of early rate cuts from RBI."
The partially convertible rupee closed at 61.88/89 per dollar compared with 62.02/03 on Monday. It hit a low of 62.25 on Monday, its weakest since Feb. 20.
Hopes the RBI would cut interest rates by early next year supported the rupee by raising confidence about the domestic economy. Still, Indian shares fell on a bout of profit booking, limiting any further gains in the rupee.
In the offshore non-deliverable forwards market, the one-month contract was at 62.14/24, while the three-month was at 62.65/75.