The rupee appreciated by a further 73 paise to close at an almost seven-week high of 61.73 against the dollar on Thursday as the US currency weakened globally following the budget impasse in Washington and fears of the Fed tapering its stimulus programme receded.
Dollar sales by exporters and firm local equities also supported the local currency.
The rupee opened at 62.15 a dollar from the previous close of 62.46 at the interbank foreign exchange market and touched a low of 62.22.
It bounced back to a high of 61.65 before settling at 61.73, a rise of 73 paise or 1.17 per cent.
The rupee was at the highest level since August 16, when it closed at 61.65 against the dollar.
Finance Minister P Chidambaram has said the value of the rupee based on the real effective exchange rate was 59-60 to a dollar.
"The gains were mainly attributed to the sharp weakness in the US dollar index and strength in the euro," said Abhishek Goenka, CEO of India Forex Advisors.
"The US dollar weakened globally following a failure by US lawmakers to resolve a budget impasse."
The 30-share S&P BSE Sensex shot up 384.92 points or 1.97 per cent as the partial US government shutdown eased investor concerns about a tapering of the Federal Reserve's stimulus programme.
Foreign institutional investors pulled out a net Rs 106.97 crore (1069.7 million) of shares on Tuesday, according to provisional data with the stock exchanges.
The dollar index, a gauge of six major global rivals, was down by 0.07 per cent.
"The trading range for the USD-INR pair is expected to be within 61.00 to 62.80," said Pramit Brahmbhatt, CEO of Alpari Financial Services (India).