The rupee appreciated 19 paise to close at 82.51 (provisional) against the U.S. dollar on Wednesday after the Reserve Bank of India (RBI) hiked the repo rate by 25 basis points.
A rally in the domestic equity markets and weakness in the greenback against major crosses overseas also supported the rupee, forex traders said.
However, surging crude prices in the international market and persistent foreign fund outflows restricted the appreciation bias in the local unit, they added.
At the interbank foreign exchange market, the local unit opened strong at 82.67 and touched an intra-day high of 82.47 and a low of 82.72 against the greenback.
It finally settled at 82.51, up 19 paise over its previous close of 82.70.
The Reserve Bank of India slowed the pace of interest rate increases for the second straight time when it on Wednesday expectedly increased borrowing cost by 25 basis points but hinted more to come as core inflation remained high.
The central bank projected India's economic growth at 6.4% for 2023-24, broadly in line with the estimate of the Economic Survey tabled in Parliament last week.
It also estimated retail inflation to ease to 5.3% in the next fiscal from 6.5% this year on assumptions of lower imported inflation, even though core inflation remains sticky.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, slipped 0.38% to 103.03.
Global oil benchmark Brent crude futures rose 1.31% to $84.79 per barrel.
On the domestic equity market front, the 30-share BSE Sensex jumped 377.75 points or 0.63% to end at 60,663.79, while the broader NSE Nifty advanced 150.20 points or 0.85% to 17,871.70.
Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Tuesday as they offloaded shares worth ₹2,559.96 crore, according to exchange data.