MUMBAI: The rupee appreciated 5 paise to close at 83.32 against the US dollar on Wednesday as more foreign funds flowed into the Indian stock markets which have shot up to lifetime highs.
However, funds flowing into the stock markets are considered "hot money" and can exit at short notice. Market analysts are, therefore, cautious on how much the rupee will gain ahead. Much will also depend on oil prices.
The dollar index, which gauges the American currency's strength against a basket of six currencies, was also trading 0.07 per cent lower which helps the rupee.
The dollar has recently started weakening on expectations that the US Federal Reserve will begin cutting interest rates next year.
This has also helped currencies of emerging markets to recover some of the lost ground.
Forex traders said that the RBI went in for buying dollars which limited the rise of the rupee.
The buying and selling of dollars by the RBI is aimed at preventing wide fluctuations in the rupee and keep it steady. When the rupee goes into a free fall, the RBI sells dollars in order to prop the Indian currency.
Conversely, when the rupee rises, it gives the RBI an opportunity to buy dollars.
The forex market is also reported to be in a wait-and-watch mode ahead of the RBI's Monetary Policy Committee (MPC) meeting which has started its three-day deliberations to take a call on interest rates.
The monetary policy review will be announced on Friday.