The partially convertible rupee closed up 0.3% to 79.23 per U.S. dollar, having jumped to 78.94 in the session. A rebound in the greenback late in the day weighed, with the rupee ending a volatile week little changed.
The Reserve Bank of India (RBI) Governor Shaktikanta Das said the monetary policy committee decided to raise the repo rate to 5.40%, adding that it believed inflation had peaked and domestic growth remained robust.
"With the outlook that inflation will likely soften, and only if inflation risks don't flare up again, this probably implies that hikes of a smaller size are likely in the upcoming meetings," ANZ Research analysts wrote in a note.
"While the rupee isn't a stated policy target for the MPC, it has likely played an indirect role in today's decision in our view, given its weakness has exacerbated imported inflation."
Analysts don't expect any further sharp falls in the rupee if the RBI stays on a tightening path. The currency has depreciated more than 6% this year like most of its emerging market peers, with the RBI stepping in occasionally to curb the volatility.
Das said the bank was watchful of maintaining rupee stability but it did not favour any particular level.
Optimism over the economy also pushed Indian stocks higher, while India's benchmark 10-year bond yield firmed to 7.29%. [IN/]
(Reporting by Anushka Trivedi in Mumbai; Editing by Saumyadeb Chakrabarty)
By Anushka Trivedi