The rupee gained 17 paise to close at 82.68 (provisional) against the US dollar on Thursday after the Reserve Bank left its key interest rates unchanged.
Forex traders said rupee appreciated tracking a weak tone in the US dollar. However, weak domestic markets and a surge in crude oil prices capped sharp gains.
At the interbank foreign exchange market, the local unit opened at 82.81 against the US dollar and moved in a range of 82.68 to 82.86 in the day trade.
The rupee finally settled 17 paise higher at 82.68 (provisional) against the previous close of 82.85 on Wednesday.
The Reserve Bank of India (RBI) on Thursday left its key interest rates unchanged for a third straight meeting but signalled tighter policy if food prices drive inflation higher.
The hawkish stance was also reinforced by the unexpected announcement of reducing the cash in the banking system by raising the incremental cash reserve ratio (ICRR) to 10 per cent on the incremental NDTL (net demand and time liabilities) over the last 3 months.
This will help in absorbing a large part of the excess liquidity created through the return of the Rs 2,000 notes and the large dividend to the government from RBI.
The move is expected to suck out about Rs 1 lakh crore from the banking system, he said, adding that this liquidity tightening measure will not impact credit needs of productive sectors.
"We expect rupee to trade with a negative bias on risk aversion in global markets and rising global crude oil prices. However, a weak US dollar may support rupee at lower levels.
"Traders may take cues from US inflation data. Headline inflation is expected to rise to 3.3 pc from 3 pc while core inflation is expected unchanged at 4.8 pc on an annual basis. We expect the USDINR spot to trade in the range of 82.40 to 83.30 in the near-term," said Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.30 per cent to 102.17.
Brent crude futures, the global oil benchmark, declined 0.11 per cent to USD 87.45 per barrel.
On the domestic equity market front, the 30-share BSE Sensex closed 307.63 points or 0.47 per cent lower at 65,688.18. The broader NSE Nifty fell 89.45 points or 0.46 per cent to 19,543.10.
Foreign Institutional Investors (FIIs) were net buyers in the capital markets on Wednesday as they purchased shares worth Rs 644.11 crore, according to exchange data.
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