The rupee gained on Wednesday as heavy foreign fund buying of debt and equities boosted the local unit, but good demand for the greenback from state-run banks and caution ahead of retail inflation data prevented further gains.
Foreign institutional investors have been buying both shares and debt in recent weeks, helping stocks climb to record highs for a second time this week while the benchmark 10-year bond yield dropped to a 15-month low.
So far in November, foreign funds have bought shares worth $1.36 billion and debt worth $597 million, taking total inflows so far this year to $15.1 billion and $23.1 billion in the two asset classes respectively.
Traders will take opening cues for Thursday from the retail inflation data which will be released after market hours amid rising expectations that the central bank may opt for earlier-than-anticipated rate cuts if inflation falls faster.
A Reuters survey of economists and analysts predicted consumer price inflation cooled to an annual 5.80 percent in October, a record-low, dragged by a sharp drop in food and oil prices.
"Good retail inflation should be positive for the rupee, but since state banks are buying dollars at every level, I don't see much appreciation for the rupee," said Paresh Nayar, head of fixed income and foreign exchange trading at First Rand Bank.
"Sixty-one remains a good support for the pair in the near term. It appears the RBI doesn't want the INR to strengthen so as to remain competitive on the exports front," he added.
The partially convertible rupee closed at 61.4925/5000 per dollar compared with 61.55/56 on Tuesday.
Traders also said volumes in the foreign exchange market were impacted and were down to just a little over half the usual volumes on back of the strike at most banks.
The BSE Sensex and Nifty touched record highs for the second time this week as rate-sensitive stocks such as Axis Bank rose on hopes easing inflation would prompt the Reserve Bank of India (RBI) to cut interest rates earlier than expected.
Movements in the dollar versus majors and other Asian units will continue to be monitored for near-term direction.
In the offshore non-deliverable forwards, the one-month contract was at 61.74/84, while the three-month was at 62.33/43.
