The rupee strengthened on Tuesday as shares rallied more than 1 per cent, boosting hopes for more portfolio inflows. The dollar's losses versus major currencies also helped sentiment.
At 10:25 am (0455 GMT), the partially convertible rupee was at 46.35/36 per dollar, stronger than 46.40/41 at close on Monday when it had risen to 46.2650, its highest since Aug. 10. Rupee has traded in a band of 46.28-46.38 so far.
"Expectations of capital inflows are keeping rupee on a positive note but bids are emerging from importers," said Vikas Chittiprolu, a senior forex trader at state-run Andhra Bank. He predicted a range of 46.25-46.45 for the day.
Shares were trading up 0.8, after having climbed more than 1.4 per cent earlier, as bullishness over the Indian growth story continued to lure investors.
Foreigners have bought shares worth $13.7 billion so far in 2010, in addition to last year's record $17.5 billion purchases.
The dollar was near its one-month low against a basket of currencies after suffering its steepest fall against the euro in two months the previous day on rising investors risk appetite.
The index of the dollar against six majors was down 0.13 per cent. Asian currencies were trading mixed.
Chittiprolu said inflation data due at 11 am (0530 GMT) would be watched but it was more likely to have an impact on the forwards market rather than the spot rupee.
The wholesale price index in August probably rose 9.6 per cent from a year earlier, easing from a rise of 9.97 per cent in July. Forecasts by 15 economists ranged from 9.36 per cent to 9.84 per cent.
"Forwards are already discounting a rate hike so if inflation eases, then there is also likely to be some easing in the forwards," Chittiprolu said.
Expectations for at least a 25 basis points hike in key rates, at the Reserve Bank of India's policy review on Thursday at 0630 GMT, have increased following robust factory data.
Industrial output accelerated much faster than expected in July on surging capital goods production, strengthening the case for further monetary tightening by the central bank to tame the near double-digit inflation.
Higher domestic rates draw foreign investors looking for better returns than in other developed economies where rates are still close to zero.
"Inflation is going to be watched for cues on the likely rate actions but currently it's flows and the appetite to take risks which is deciding the direction for markets," a senior dealer with a large state-run bank said.
One-month offshore non-deliverable forward contracts were quoted at 46.53, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX were both at 46.4450, with the total traded volume on the two exchanges at about $1 billion.