The rupee extended gains for a second straight day to a new 26-month closing high on Tuesday with sentiment bolstered by robust foreign fund inflows and the greenback's weakness overseas.
The rupee ended at 46.59/60 per dollar, up from the previous close of 46.66/67 which was the previous 26-month closing peak.
It has risen 0.32 per cent against the dollar in the past two sessions and is up nearly three per cent so far in 2003.
Analysts say more gains are in store as it is still undervalued by nearly three per cent against the currencies of its five major trading partners.
"There were some Haj payments and dollar buying by state-run firms," said a dealer in a government-run bank.
"Despite intervention by the central bank in early deals, inflows were quite strong and pushed the rupee up towards close."
Traders expect the rupee to continue to draw support from steady foreign investment inflows, trade remittances and the greenback's continued weakness overseas.
Offshore funds, which have considerable influence in local markets, have added Indian assets worth $259.3 million to their portfolios so far this month.
The bulk of their purchases have been in share markets, driven by hopes that a near-normal monsoon this year will spur demand in an economy that depends heavily on the farm sector.
India's benchmark share index ended at its highest level in 14 months at 3,431.03 points as investors bought stocks across sectors amid sentiment buoyed by strong gains in global markets and hopes of further strong foreign inflows.
Rupee premiums on the forward dollar eased as the local currency continued to notch gains, having earlier inched up after some corporates hedged exposures.
The six-month forward closed at an annualised 2.07 per cent, off a morning high of 2.19 per cent and the previous close of 2.14 per cent. It dropped 30 basis points on Monday on the back of a relatively sharp rise by the rupee.