The rupee darted up 27 paise to close at 71.16 against the US dollar on Thursday, led by optimism over the Brexit deal amid softening crude oil prices.
Persistent foreign fund inflows and robust buying in domestic equity markets added to the momentum, forex traders said.
At the interbank foreign exchange market, the rupee opened at 71.38 against the US dollar. During the day, the domestic unit fluctuated between a high of 71.14 and a low of 71.47, before finally ending at 71.16, up 27 paise over its previous close.
"Rupee has appreciated nearly 1 per cent in two days. The hopes of US-China closing the phase-one trade deal along with the announcement Brexit deal, has kept all emerging market currencies including rupee, afloat," said Rahul Gupta, Head of Currency, Emkay Global Financial Services.
Global markets rallied after Britain and the European Union said they have struck an outline Brexit deal after prolonged negotiations.
The deal, however, must still be formally approved by the bloc and ratified by the European and UK parliaments.
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Weak US economic data, fall in dollar index and speculation over the third rate cut by US Fed added to the strength in rupee, Gupta said, adding that the domestic currency can appreciate further if the Brexit deal gets parliamentary approval.
"On the domestic front, in the last couple of sessions FIIs too have participated, which is supporting the rupee," said Gaurang Somaiyaa, Forex & Bullion Analyst, Motilal Oswal Financial Services.
Foreign institutional investors (FIIs) remained net buyers in the capital markets, infusing Rs 1,158.63 crore on Thursday, exchange data showed.
The dollar index, which gauges the greenback's strength against a basket of six currencies, slipped 0.31 per cent to 97.69.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 71.5051 and for rupee/euro at 79.0184. The reference rate for rupee/British pound was fixed at 91.3506 and for rupee/100 Japanese yen at 65.77.
Meanwhile, Brent futures, the global oil benchmark, was trading 0.50 per cent lower at USD 59.12 per barrel.
The 10-year government bond yield was at 6.50 per cent.
On the domestic equity market front, the 30-share BSE Sensex rallied 453.07 points, or 1.17 per cent, to 39,052.06. The broader NSE Nifty too spiked 122.35 points, or 1.07 per cent, to settle at 11,586.35.