The 81.53 provisional value was appreciated by 29 paise to end at 81.53 against the US dollar on Tuesday as heavy buying in domestic equities and weakness in the dollar strengthened investor sentiment.
The rise in crude prices in the international market capped the rupee's gain, forex dealers said.
The local unit opened strong against the dollar at 81.66. During the session, it saw an intra-day high of 81.36 and a low of 81.66.
It ended up at 81.53, up 29 paise from its previous close. The previous session's price was lower at 81.82 against the dollar, paise 42 lower in the previous session.
After the RBI hiked rates by 50 bps, the RBI retraced from its all-time lows. The manufacturing PMI number released from the US came in below estimates, which helped boost the dollar's rebound from high levels.
Market participants are on the edge because of the change in economic policies, which keeps the volatility high in major crosses. The focus will be on the factory order number to gauge a view for the dollar. Gaurang Somaiya, Forex Bullion Analyst, Motilal Oswal Financial Services, said that the USD INR Spot is expected to quote in the range of 81.20 and 82.05.
In the domestic equity market, the 30-share BSE Sensex jumped 1,276. It was 66 points or 2.25 per cent to close at 58,065. The NSE Nifty grew 386.95 points or 2.29 per cent to 17,274, and the broader NSE Nifty increased by 386.95 points or 2.29 per cent. The dollar index, which measures the strength of the dollar against a basket of six currencies, fell 0.49 per cent to 111.20.
Brent crude futures, the global oil benchmark, rose 0.82 per cent to USD 89.59 per barrel.
Foreign institutional investors FIIs were net buyers in the capital markets as they bought shares worth Rs 590 crore on Monday, according to exchange data.