The rupee gained 0.4% to 47.965 per dollar at the close, from 48.135 at the end of last week.
The rupee advanced to the strongest closing level in six weeks on optimism foreigners will pour more money into the nation?s shares, lured by the economy?s relatively fast growth.
The rupee may extend its advance as ?capital inflows into the financial markets have increased and the economic outlook has improved,? said Roy Paul, assistant manager of treasury at Federal Bank.
The rupee will advance to 47.3 by the year-end, helping Asia?s third-largest economy save on costs of buying crude oil and sugar, Goldman Sachs economist Tushar Poddar said in a September 20 interview in the resort city of Goa.
Bond yields rose on Tuesday after a 50% increase in this week?s bond auction from its scheduled size renewed concerns about government borrowing needs and triggered a sell-off, traders said.
The benchmark 10-year bond yield ended at 7.13%, above Friday?s close of 7.09%.The market was shut on Monday for a holiday.
?I think people were creating room for the state loan auction on Tuesday, and of course, they were also concerned about the size of Friday?s auction,” said a trader at a foreign bank.
The auction, the last of the first half of the 2009/10 fiscal year, was increased to Rs 12,000 crore from a scheduled size of Rs 8,000 crore.
Traders are waiting for the second half borrowing calendar, which is expected next week. A finance ministry official said last week the government would stick to its full-year borrowing plan of Rs 4.51 lakh crore.
The central bank is due to sell Rs 6,000 crore of treasury bills on Wednesday.
After market hours on Tuesday, the central bank said it would buy back up to Rs 6,000 crore of bonds from the market at an auction on September 24.
Dealers said a sharper rise in yields was prevented by expectations the central bank would not raise policy rates any time soon, and that a possible change in accounting rules on hold-to-maturity accounts for banks could support demand.
Overnight call rates ended lower at 3.27% compared to the previous day`s close of 3.78%.The volume of 1-day market repo stood at Rs 381.71 lakh crore.