Strong foreign fund inflows, a weakening dollar and slipping oil prices propped up the local unit.
The rupee rebounded by 52 paise to close at 70.72 against the US dollar on Thursday as investors wagered on de-escalation of tensions between India and Pakistan.
Strong foreign fund inflows, a weakening dollar and slipping oil prices also propped up the local unit, analysts said.
In a surprise announcement, Pakistan Prime Minster Imran Khan told a joint session of Parliament that IAF's captured pilot Wing Commander Abhinandan Varthaman will be released on Friday as a gesture of peace.
At the Interbank Foreign Exchange (forex) market, the domestic unit opened slightly up at 71.22. It rose to an intra-day high of 70.70, before finally ending at 70.72, showing a gain of 52 paise.
The domestic currency had tumbled 17 paise to 71.24 against the US dollar Wednesday.
"India rupee gained after two days of weakness against American dollar on chances of de-escalation of tension with Pakistan.
“Beside dollar weakness, the foreign fund inflows in domestic equity and lower crude oil prices bode well for rupee.
"So far this month, overseas investors have bought USD 2.31 billion in domestic equity," said V K Sharma, head PCG and Capital Markets Strategy, HDFC Securities.
The dollar index, which gauges the greenback's strength against a basket of six currencies, dropped 0.22 per cent to 95.94 as US President Donald Trump's summit with North Korean leader Kim Jong Un ended without an agreement.
The pound slipped from its highest against the dollar since July and a 21-month high against the euro after opposition Labour Party's alternative plan was rejected.
Meanwhile, foreign investors (FIIs) remained net buyers in the capital markets, putting in Rs 3,210.60 crore on a net basis on Thursday, as per provisional data.
Brent crude futures, the global oil benchmark, slipped 0.92 per cent to $65.83 per barrel on rise in US crude oil output and weaker Chinese manufacturing data.