Foreign inflows into local debt and equity markets spurred the rise to an over one-month high against the U.S. currency on Tuesday.
The rupee opened at 79.1475 per US dollar, up from its previous close of 79.5225, notching up its best session this month.
The local currency was at 79.0350 around the middle of the session, its highest level since Aug 5. The Chinese yuan and the Indonesian rupiah were barely changed by comparison.
A trader at a Mumbai-based state-owned bank said that the rupee's ability to open above the key 79.40 level was an additional trigger for the USD INR pair to fall closer to the 79 level.
The rupee was supported by the inclusion of Indian bonds in global indexes and lower oil prices.
Anindya Banerjee, the head research FX and interest rates at Kotak Securities said the rupee continues to be an outperformer as FPI foreign portfolio inflows support the pair.
Carry trade in the rupee is fuelled by lower oil prices and the expectation of Indian bond inclusion in the global bond index. Morgan Stanley expects JPMorgan to include Indian bonds in global indexes this year. Goldman Sachs reckons that the inclusion will lead to overall inflows of around $30 billion.
Foreign investors have purchased around $1 billion so far in September after buying $6.5 billion of Indian equities last month. Since the beginning of August, the debt investment has been more modest, with around $500 million in overseas.
Oil prices went up on Tuesday, but were still down month-to-date.
The dollar index declined ahead of the U.S. inflation data, which is expected to show a decline in headline inflation and a rise in core inflation.
Since April, Indian equities have reached their highest level since April, while rupee forward premiums went up.