The rupee hit a five-week high on Friday as the Reserve Bank of India's measures to drain liquidity shore up the currency, but the unit gave up most gains as sustained dollar demand from importers to meet month-end import commitments weighed.
The rupee's gains come after the RBI followed up on its measures last week to drain cash to defend the rupee with additional tightening measures on Tuesday.
The RBI's measures have made holding dollars far more expensive, prompting investors, particularly foreign banks, to liquidate dollar holdings, which helped the rupee.
Investors will now focus on the RBI policy review on Tuesday. The apex bank is not expected to raise the policy repo rate or raise the cash reserve ratio, but its statement could provide key details about its plans for the future.
"I think the measures have been more drastic and very impulsive. These measures are aimed more at taming depreciation in the short term," said Subramanian Sharma, director at Greenback Forex.
"The euro and dollar moves today have also been key in boosting the rupee. These measures will have limited long-term impact unless followed up with more measures to bring in dollar inflows like a sovereign dollar bond," he added.
The partially convertible rupee closed at 59.04/05 per dollar compared with 59.11/12 on Thursday. The unit rose as high as 58.69, its strongest since June 19.
On the week, the rupee rose 0.5 per cent, gaining for the third week in a row.
Traders said broad losses in the dollar, especially against the euro, also aided the rupee's gains, though that was offset by greenback demand to the tune of around $300 million from a large power producer.
Some traders, however, expect the rally in the rupee to continue in the short term, especially with the dollar index expected to remain weak in the near term.
"The pair is likely to head lower towards 57.50 or 57 levels next week. Dollar is showing weakness against all majors and given the positive sentiment for rupee, it can breach 58 levels," the head of forex trading at a state-run bank said.
"The central bank's policy review may also have some positives for the rupee," he added.
The onshore forward dollar premiums edged down tracking gains in the rupee. The one-year premium dropped to 473 points from 482 points on Thursday.
In the offshore non-deliverable forwards, the one-month contract was at 59.46 while the three-month was at 60.31.
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 around 59.07 with a total traded volume of $2.98 billion.
Copyright: Thomson Reuters 2013