The rupee was weighed down by strong dollar demand from oil firms on Thursday but the Reserve Bank of India's (RBI) notification of the increase in foreign institutional investment limits in debt prompted some dollar selling by exporters.
RBI relaxed some of the rules for foreign institutional investors (FIIs) buying into domestic debt as part of the government's long-expected $10 billion increase in corporate and government debt limits.
The increase in FII limits will bring in more dollar inflows and help the rupee, prompting some exporters to liquidate their dollar holdings at current levels, traders said.
The rupee is expected to trade in a range until RBI's critical policy review on Tuesday, when the central bank is widely expected to cut interest rates by 25 basis points. Forex markets will be closed on Friday for a local holiday.
"There weren't too many flows today but oil demand was seen all day. News about the hike in FII limits in bonds helped the rupee, though actual flow still needs to come. These are only sentiment boosters," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
"The rupee is likely to be in a range of 53.55-54.30 next week as some nervousness before policy can be expected," he added.
The partially convertible rupee closed at 53.68/69 per dollar versus its previous close of 53.665/675. The unit moved in a wide range of 53.62 to 53.8950.
Some traders were also seen covering their short dollar positions ahead of the long weekend.
The Sensex fell as Tata Motors Ltd slumped after the company issued a profit warning at its key Jaguar Land Rover unit.
In the onshore forwards market, the one-year premium rose to 335 points from 329.75 points on Wednesday while in the offshore non-deliverable forwards, the one-month contract was at 53.90 while the three-month was at 54.47.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at 53.6950 with a total traded volume of $6.50 billion.
Copyright @ Thomson Reuters 2013