The rupee bounced back by 54 paise to close at an almost two-month high of 61.39 against the dollar amid sales of the US currency by exporters, firm equities and capital inflows.
The local currency opened at 62.20 a dollar from the previous close of 61.93 and immediately touched a low of 62.29 at the interbank foreign exchange market.
It rebounded to a high of 61.32 on dollar selling by exporters and positive local equities before closing at 61.39, a rise of 54 paise or 0.87 per cent. It was the highest close for the local currency since 61.19 on August 13.
The dollar had shown strength on expectations US lawmakers would reach an agreement on the debt ceiling and prevent a default.
"The initial weakness in the rupee was mainly attributed to the strength in the US dollar," said Abhishek Goenka, CEO of India Forex Advisors. "Later, a spur of gain was seen on the back of local banks selling dollars. The market is expecting some more measures to be announced, which would further help the rupee to gain."
Goenka also said the rupee got support from an IFC plan to sell $1 billion of rupee bonds offshore and use the proceeds to finance private sector investment in India.
The International Finance Corporation (IFC), a member of the World Bank Group, Wednesday announced the launch of a $1 billion offshore rupee bond programme to strengthen India's capital markets and attract greater foreign investment.
The 30-share S&P BSE Sensex closed up 23.65
Forward dollar premiums remained weak on sustained receipts by exporters.
The benchmark six-month forward dollar premium payable in March declined to 227-230 paise from 233-1/2-235-1/2 paise previously andfar-forward contracts maturing in September dropped to 432-435 paise from 438-1/2-441-1/2 paise.
The RBI fixed the reference rate for the dollar at 62.1383 and for the euro at 83.8725.
The rupee improved further to 97.91 against the pound from 98.80 previously and to 83.07 per euro from 83.70.
It bounced back against the Japanese yen to 62.78 per 100 yen from 63.67. dropped by 25 paise to 62.18 against the dollar in the late morning trade on persistent dollar demand for the American currency from banks and importers.
The local currency resumed lower at 62.20 per dollar as against the last closing level of 61.93 per dollar at the Interbank Foreign Exchange Market and hovered in a restricted range of 62.29 per dollar and 62.14 per dollar before quoting at 62.18 per dollar at 1040 hours.
Banks and importers preferred to increase their dollar positions in view of the firmness of the American currency in overseas market, a forex dealer said.
In New York, the dollar gained ground versus major rivals on Wednesday after the minutes of the September Federal Reserve meeting showed most members of the central bank’s policy panel still hoped to begin scaling back the flow of monetary stimulus later this year.