The rupee pared its initial losses and settled 44 paise higher at 81.25 (provisional) against the U.S. dollar on Wednesday, tracking a weak greenback overseas and a firm trend in domestic equities.
However, rising crude oil prices capped the gains in the rupee, traders said.
At the interbank foreign exchange market, the local unit opened weak at 81.80, but pared the losses and settled for the day at 81.25 (provisional), registering a rise of 44 paise over its previous close.
During the trading session, the local unit witnessed an intra-day high of 81.25 and a low of 81.82 against the American currency.
On Tuesday, the rupee had closed at 81.69 against the U.S. dollar.
The dollar index, which gauges the greenback's strength against a basket of six currencies, declined 0.45% to 101.93.
Global oil benchmark Brent crude futures rose 1.38% to $87.11 per barrel.
According to Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services, volatility in rupee remained elevated after the Bank of Japan (BoJ) held rates unchanged.
Inflows on the domestic front also led to gains in the rupee.
"The BoJ decided to keep its yield curve tolerance band and ultra-dovish -0.1% interest rate unchanged. The Japanese Yen lost by about over 2% after the release of the policy statement," Mr. Somaiya said.
Investors will now focus on retail sales numbers from the U.S.
"We expect the USD-INR [Spot] to trade sideways and quote in the range of 81.20 and 81.70," Mr. Somaiya added.
On the domestic equity market front, the 30-share BSE Sensex advanced 390.02 points or 0.64% to end at 61,045.74, while the broader NSE Nifty rose 112.05 points or 0.62% to 18,165.35.
Foreign Institutional Investors (FIIs) turned net buyers in the capital markets on Tuesday as they purchased shares worth ₹211.06 crore, according to exchange data.