The Indian rupee pared gains but finished stronger against the dollar on Thursday as global markets were buoyed by the U.S. Federal Reserve Chair Jerome Powell's comments that were less hawkish than expected.
The partially convertible rupee ended at 81.2150 per dollar, compared to its previous close of 81.4225.
The currency had briefly strengthened to a two-week high of 80.99 in early trades, but gradually gave up some of those gains.
State-run banks were seen bidding for dollars on behalf of oil companies, two traders said, citing lower spot prices.
That led the rupee to underperform its Asian peers. The Malaysian ringgit, the Indonesian rupiah and the South Korean won gained between 0.9% to 1.5% as the greenback extended its slump.
The dollar index has shed 1.8% from its high on Wednesday after Powell, in his last scheduled appearance before the central bank's next meeting in two weeks, said U.S. rate hikes could be scaled back "as soon as December" and that the Fed hoped not to "over-tighten."
"Overall, the speech can be said to be leaning towards moderation in hawkishness and this has brought a great sense of comfort to markets," analysts at IFA Global wrote in a note.
Equities in Asia jumped as well, with Indian stocks rising for the eighth straight session and hitting another record high. Foreign investors bought more than $4 billion worth of domestic shares in November.
Despite strong inflows and positive cues, market participants are doubtful about the rupee's likely trend for the rest of the year as a wide current account keeps the currency under pressure.
"Trade balance has only marginally benefited from lower oil as exports are weakening fast," said Dhiraj Nim, economist and strategist with ANZ Research.
"This is a problem for the rupee, which may have contributed to its regional underperformance (last month) alongside central bank buying dollars on dips." (Reporting by Anushka Trivedi in Mumbai; Editing by Janane Venkatraman)