The rupee appreciated 21 paise to close at 81.74 (provisional) against the US dollar on Wednesday, tracking the weakness of the American currency in the overseas market.
Forex traders said a positive trend in domestic equities also supported the local unit.
At the interbank foreign exchange market, the local unit opened at 82 against the US currency and finally closed at 81.74 (provisional), registering a gain of 21 paise over its previous close.
During the session, the rupee touched a high of 81.68 and a low of 82.01 against the dollar.
On Tuesday, the rupee closed at 81.95 against the US currency.
The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.43 per cent to 101.42.
Global oil benchmark Brent crude futures rose 0.12 per cent to USD 80.87 per barrel.
The rupee appreciated on positive domestic equities and a weak US dollar. However, recovery in crude oil prices and FII outflows capped sharp gains, said Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas.
The US Dollar declined on rising concerns over recession amid disappointing economic data from the US and renewed banking concerns.
"We expect the rupee to appreciate on weakness in US Dollar as banking concerns raised expectations that Fed may go dovish in its upcoming Federal Open Market Committee (FOMC).
"Concerns over the economic slowdown in the US may also put pressure on the greenback. However, selling pressure from foreign investors may cap a sharp upside. We expect USD/INR spot to trade in between 81.20 to 82.20 in the near term," Choudhary said.
On the domestic equity market front, the 30-share BSE Sensex advanced 169.87 points or 0.28 per cent to end at 60,300.58 points, and the broader NSE Nifty gained 44.35 points or 0.25 per cent to 17,813.60 points.
Foreign Institutional Investors (FIIs) were net sellers in the capital market on Tuesday as they offloaded shares worth Rs 407.35 crore, according to exchange data.
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