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The rupee traded at an eight-month high on Friday, while the BSE Sensex and the broader Nifty hit record highs for a fifth successive sess...

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The rupee traded at an eight-month high on Friday, while the BSE Sensex and the broader Nifty hit record highs for a fifth successive session. Sharp gains in the currency came on the back of continued buying by overseas investors, who bought domestic shares worth 2,192 crore on Thursday, taking total inflows so far in 2014 to more than Rs. 20,000 crore. 

Fundamentally, the sharp narrowing of the current account deficit has been the biggest driver for the rupee. India's current account deficit is likely to be below 2 per cent of GDP this fiscal as compared to a record 4.8 per cent of GDP last year. A sharp reduction in import of gold coupled with rising exports have helped narrow deficit.

A series of steps taken by Reserve Bank of India Governor Raghuram Rajan, since he assumed office in September 2013, has helped the currency find its feet, analysts say.

Traders expect the unit to hold in a 59.50 to 61.00 range in the near term. Analysts say though the near-term bias is for the rupee strength, investors must remain cautious.

"Enjoy the stability and INR appreciation but be on close guard against an INR weakness which can happen if there is a pull-out of hot FII money and on the back of any election-related negative news," said Samir Lodha, managing director at QuantArt Market Solutions.

Further gains in the rupee on Friday could be capped given traders expect good dollar demand from importers to meet month-end commitments, while the Reserve Bank of India could continue to buy the US currency to build up its foreign exchange reserves.

The Reserve Bank of India (RBI) has been suspected to have bought dollars aggressively over the last two trading sessions to shore up its foreign exchange reserve and prevent a massive appreciation in the local unit which could be detrimental to export growth.

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