The rupee appreciated by 10 paise to end at 68.86 against the US dollar Tuesday following a robust response to RBI's maiden rupee-dollar swap auction.
Sustained foreign fund inflows and heavy buying in domestic equities also propped up the local unit, forex traders said.
Under the rupee-dollar swap auction conducted Tuesday, the Reserve Bank received bids for USD 16.31 billion, against the notified amount of USD 5 billion.
At the Interbank Foreign Exchange (forex) market, the rupee opened strong at 68.88 against the greenback but surrendered the gains to slip to a low of 68.98.
However, it clawed back lost ground and finally ended at 68.86, up 10 paise against its previous close of 68.96 per dollar.
"The success of India's USD 5 billion swap auction will decide whether it will become a popular instrument in the central bank's liquidity tool box," said V K Sharma, Head PCG and Capital Markets Strategy, HDFC Securities.
"The rupee appreciated further as foreign institutional flows continue to find their way into Indian markets," said Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management.
Foreign institutional investors (FIIs) pumped in Rs 150.40 crore on a net basis Monday, provisional data showed.
The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.07 per cent to 96.50.
Meanwhile, global crude prices were trading higher and this restricted the rupee's upmove.
Brent crude futures, the global oil benchmark, was trading 0.88 per cent up at USD 67.80 per barrel.
Meanwhile, benchmark Sensex rebounded about 425 points, or 1.12 per cent, to end at 38,233.41 Tuesday. The broader NSE Nifty climbed 129 points, or 1.14 per cent, to 11,483.25.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 68.8469 and for rupee/euro at 77.8663. The reference rate for rupee/British pound was fixed at 90.7737 and for rupee/100 Japanese yen at 62.55.
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