MUMBAI The rupee rose to a near 1-week high on Wednesday, buoyed by hopes of continued strong capital inflows as shares posted a strong showing, outperforming most regional peers.
Capital inflows into Indian stocks have crossed $24 billion in 2012, with a large part of inflows driven after the government's move to push ahead with its ambitious reforms programme since mid-September.
The inflows have helped overshadow concerns about the country's twin deficits, on the current and fiscal accounts, sparking a recovery in the rupee from its record low of 57.32 hit in late June.
"Foreign funds have been selling dollars, likely related to year-end squaring of positions. The market is thin, so any flows will move markets," said Naveen Raghuvanshi, associate vice president at Development Credit Bank.
The partially convertible rupee closed at 54.8350/8450 per dollar versus its Monday close of 54.95/96, after touching an intraday high of 54.8050, its best level since December 20.
Volumes were thin, reflecting trading in global currency markets, which remained sluggish, after most global financial centres were closed for Christmas on Tuesday.
The government announced incentives to revive growth in exports on Wednesday as it looks to narrow a trade deficit that has put the country's current account balance and currency under pressure.
Globally, the yen continued to remain in focus with the Japanese unit sliding to a 20-month low in Asian trade as Shinzo Abe assumed Japan's helm with a mandate to weaken its currency and push for more drastic monetary and fiscal stimulus.
Traders are also keeping an eye on developments from the U.S. "fiscal cliff" talks as U.S. President Barack Obama appeared to cut short his Hawaiian holiday to leave for Washington.
In the offshore non-deliverable forward market, the one-month contract was at 55.15 while the three-month was at 55.69.
In the currency futures market, the most-traded near-term dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange closed at around 54.89 with a total traded volume of $5.75 billion.
(Editing by Subhranshu Sahu)