On Friday, the rupee logged its second biggest gain in nearly three years rising by 119 paise or 2.6 percent, to settle at the two-week high of 55.64, against the American greenback on robust capital inflows amid clarity on tax-avoidance rules and the unexpected steps unveiled by the European Union leaders to support the region's financial system.
However, the Indian currency is still down 4.6 percent since January and 27.4 percent since last August when the bad times for the local unit started after the US downgrade by Standard & Poor's.
"The rupee can recoup to 54-54.50 level in the near term if the positive sentiment continues along with strong action from the Euro area leaders to overcome the crisis," IDBI Bank treasury head NS Venkatesh told PTI here.
European Union leaders on Friday agreed to employ measures aimed at stabilising Spanish and Italian bond markets and establish a Eurozone-wide banking union, prompting a rally in equity markets worldwide.
"If the equity market sees positive capital inflows, then the rupee will definitely appreciate," Venkatesh added.
He, however, said the government has to take concrete policy actions to address the widening gap between current and fiscal accounts deficits to help the rupee move to sub-54 level.
While current account deficit has overshot the target by a wide margin to 4.2 percent in FY12 as a whole, and to 4.5 percent in Q4 of FY12, hitting a two decade low, the fiscal deficit too had risen to 5.76 percent in the past fiscal against a target of 4.1 percent.
Meanwhile, clarity on tax issues, especially on GAAR, has improved domestic sentiment.
"Overall sentiment is positive for the rupee, which is likely to regain 54- 54.50 level to the dollar in the coming week," he said, adding exporters and corporates are selling dollars in the hope that any further depreciation of the currency will not happen.
Bank of Baroda executive director Sudhir Kumar Jain said the rupee is showing bias towards appreciation.
"The rupee is showing bias towards appreciation and recouping to 54 level will take 15-20 days against the greenback," he added.