The Indian rupee continued to strengthen on Wednesday, hitting a near two-month high against the US dollar. It appreciated by 43 paise to close at 64.98 against the greenback.

A strong rebound in the rupee was supported by a weakening dollar in the wake of reduced chances of an interest rate hike by the US central bank. 

Last week, an official data showed that the employment growth in the US remained weak in September, leading to a decline in expectations over monetary tightening by the US Federal Reserve in 2015.

"We expect INR to be one of the outperformers in the region. India is among the best positioned in Asia to benefit from lower oil prices and it is also relatively insulated from China's economic growth slowdown (from a trade perspective) with exports to China accounting for just ~5% of India's total exports in 2014," said RBC Capital Markets in a note.

Besides, the rupee was underpinned by a rebound in domestic stock markets, which rose for a sixth consecutive session on Wednesday amid a revival in buying interest from overseas investors. So far this month, foreign investors have bought equities worth about Rs 1,500 crore (net) in the cash market, NDTV Profit reported.

The benchmark BSE Sensex index has gone up nearly 1,300 points since 29 September, the day on which the Reserve Bank of India (RBI) surprised the markets by announcing a 50 bps cut in key lending rate.

Analysts said that the domestic currency will also benefit from the RBI's decision to raise foreign investment in government bonds.

Last month, the central bank said that "it would gradually increase the limits it sets for foreign investors buying government debt by up to Rs 1.2 lakh crore by March 2018."

"Again, RBI is doing its part to help, announcing a range of measures to liberalise financial markets. For example, it increased the current USD30bn limit for foreign investment in govt bonds by USD18bn (by March 2018 in stages; currently fully utilized and up to 5% of outstanding)," said RBC note.

Also read