MUMBAI: The rupee strengthened for a second session on Friday, continuing its recovery from record lows hit this week, after the Reserve Bank of India (RBI) stepped in to defend the currency and exporters and custodian banks were heavy sellers of dollars.

The unit still posted its eight consecutive weekly fall, having hit seven consecutive record lows since May 16. Its latest was on Thursday when it fell to as much as 56.40.

The intense risk aversion from the euro zone has severely pressured the currency, but falls have been magnified by concerns about India's fiscal and economic outlooks.

A slight easing of that risk-off sentiment -- with the euro inching up from two-year lows against the dollar on Friday -- has also helped the rupee recover over the past two sessions.

"The central bank was heard to have been there to some extent in early trade, but most of the gains today were on the back of heavy selling by exporters," said N.S.S. Mani, chief foreign exchange dealer with State Bank of Travancore.

The rupee closed at 55.37/38 per dollar after ending at 55.65/66 on Thursday.

The RBI is believed to be looking to hold the rupee above the psychologically key level of 56 to the dollar, and has been seen intervening in the rupee forward markets, alongside its defence of the spot rupee.

Some of the dollar selling from exporters during the session was believed to come from companies that had missed the central bank's deadline on Thursday to convert half of their foreign currency holdings into rupees.

The outlook for the rupee remains weak, however, given concerns about India's outlook.

The rupee has fallen for eight weeks now, its longest losing streak since the 11 weeks of falls that ended in October 2008.

Analysts at Goldman Sachs and Bank of America-Merrill Lynch cut their growth forecasts for India, citing reasons such as weak investment outlook, domestic policy uncertainties and the government's expansionary policy.

Signs of fiscal consolidation from the government could help the rupee recover, analysts said.

India appeared to make a welcome gesture when it allowed state oil companies to raise petrol prices, but that unraveled after the government came under severe political pressure, raising doubts about whether it would be able to tackle the far more important hikes in fuels such as diesel.

"Any hike in diesel prices would be further positive for the rupee and could take it towards 54.60 levels while the topside should be capped at 56.50," Mani added.

Traders said there was good receiving by exporters in forwards as well, with the six-month forward premium falling to 169.75 points from 173.75 points at the open.

The one-month non-deliverable forward rate was quoted at 55.88 while the three month was at 56.62.

In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 55.40 on a total volume of $7 billion. AGENCIES