The Indian currency rose more than 4.9 percent in 2004. "It was a one-way ride. Expectations that the new year will open with a big bang, with a lot of investment inflows coming in, lifted the rupee," said U. Venkataraman, trading head at IDBI Bank.
"The dollar is expected to continue trading weak overseas, the (domestic) stock market is buoyant, oil prices have fallen.. all of these rupee-positive factors have come together for the next year."
Traders said there was little corporate or even central bank dollar demand to check the rupee's rise.
The rupee has gained in recent years as the global economic balance tipped in favour of emerging Asian economies who can produce goods and services cheaply and therefore attract floods of foreign investment.
India is growing on the back of its technology-enabled services sector, the potential of which is said to be barely tapped.
According to data out on Friday, the economy grew a better-than-expected 6.6 percent in July-September, when an erratic monsoon was expected to have weighed heavier on farms. A recent rise in the stock market, which closed at another new high, may still have steam left.
Fund managers surveyed by Reuters earlier this week said India was one of their favourite markets. Foreign funds have invested a record $8.4 billion in Indian shares in 2004, helping the rupee rise despite a ballooning import bill.
Foreign funds are expected to step-up purchases next week in anticipation of a buoyant January earnings season.
The Indian unit - only partially convertible on the current account - has recorded gains for the third straight year, having risen 5.2 percent in 2003 and 0.6 percent in 2002.