Forex dealers said a weak dollar overseas also boosted the rupee sentiment, cutting short a two-day losing trend.
The local unit commenced slightly lower at 55.10 against the dollar at the Interbank Foreign Exchange (Forex) market and touched a low of 55.21.
The rupee then touched a high of 54.94 before settling at 54.95, a net gain of 11 paise, or 0.20 per cent. In last two sessions, the local unit had dipped by 51 paise.
Meanwhile, the BSE benchmark Sensex closed marginally higher at 19,255.09. Foreign institutional investors injected USD 176.72 million into local equities on Friday, taking the total to over USD 3.5 billion in the current month so far.
"The rupee regained some of the lost ground of previous session in a thinly traded day tracking firm tone of domestic equity markets. Rising capital inflows and a weaker tone of dollar index supported gains in the local currency during the session," Alpari Financial Services (India) CEO Pramit Brahmbhatt said.
The dollar index was up by 0.19 per cent against a basket of six major global currencies.
"Rupee witnessed modest gains amid a recovery in the euro above 1.3200 and slight weakness in the US dollar index. Worldwide, all the major markets remain closed on account of the Christmas holidays, which will result in low trading volumes in the Indian markets during the next couple of sessions," said Abhishek Goenka, founder & CEO, India Forex Advisors). (MORE)