The rupee appreciated 24 paise to 81.49 against the U.S. dollar in early trade on Friday ahead of the RBI monetary policy decision.
Forex traders said the rupee gained as the dollar retreated from its elevated levels. However, the local unit is likely to remain volatile amid the announcement of the Reserve Bank of India (RBI) monetary policy decision.
At the interbank foreign exchange, the domestic unit opened at 81.60 against the dollar, then touched 81.49, registering a gain of 24 paise over its previous close.
On Thursday, the rupee recovered from record lows to settle 20 paise higher at 81.73 against the dollar.
The RBI will announce its policy rate decision at 1000 hrs on Friday with the market factoring in a 50-basis points rate hike, and a 75-basis points hike would be a surprise as other central banks have done recently, said Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.10% to 112.14.
Brent crude futures, the global oil benchmark, fell 0.19% to $88.32 per barrel.
"The dollar index has fallen, the U.S. 10-year yield is at 3.79% while oil is slightly down on the prospect of an output cut, weaker dollar and a recession," Mr. Bhansali said.
In the domestic equity market, the 30-share BSE Sensex was trading 139.9 points or 0.25% down at 56,270.06 and the broader NSE Nifty fell 32.80 points or 0.2% to 16,785.30.
Foreign Institutional Investors (FIIs) were net sellers in the capital markets as they offloaded shares worth ₹3,599.42 crore on Thursday, according to exchange data.